STATE OF NEW YORK

SUPREME COURT: COUNTY OF CHAUTAUQUA

______________________________________

ALLEN A. FREDRICKSON and

HOPE L. FREDRICKSON,

Plaintiffs,


vs HO7443


TGX CORPORATION,

Defendant.

______________________________________



JOHN L. SELLSTROM, P.C.

(Stephen E. Sellstrom,

of Counsel) for

Plaintiffs


BRANDT, LAUGHLIN, SCHAACK

WHIPPLE and CLARK, P.C.

(Dustin D. Nelson, Esq.

of Counsel) for

Defendant


DECISION


GERACE, J.


Plaintiffs sue under RPA&P Article 15 to cancel an oil


and gas lease for lessee's failure to pay delay rentals, and


on the additional ground the lease is unfair, unjust and


unconscionable; they also claim defendant has breached the


agreement by failing to provide free gas.


The plaintiffs purchased the property in June, 1989,


subject to an oil and gas lease by the vendors in February,


1974.


Defendant has moved for summary judgment on grounds


plaintiffs have failed to state a cause of action and


challenges plaintiffs' standing because the lease was not


executed by plaintiffs, but by their predecessors in title


21 years ago.


PLAINTIFFS' STANDING


Plaintiff sought forfeiture and cancellation of the


lease by invoking General Obligations Law, 15-304,


Subdivision 1, which permits the current owner of land


subject to any oil, gas or mineral land lease to pursue


cancellation where the lease becomes forfeited, terminates or


expires by its own terms.


Plaintiff's say the lease is "an unintelligible garble


of legalese"; that Turnquists had little or no experience


with leases; their business acumen and expertise was limited;


the land agent's sales tactics were high pressure; he carried


"a large bundle of cash"; there was no accurate explanation


of obligations; that the one-sidedness "shocks the


conscience".


Defendant argues that even if Turnquists as title


holders had initiated this action 21 years after the


execution of the lease, this Court could not set aside the


lease on the grounds of unconscionability. Turnquists had


received payments, albeit sporadically; they knew the lease


terms; at one point considered the lease terminated, but did


not initiate any action to enforce perceived rights.


Defendant argues plaintiffs cannot claim undue influence


or unconscionability because they were not parties to the


original lease.


Defendant says that if the lease was unconscionable as


to Turnquist, plaintiffs, one of whom is a practicing


attorney, ratified and accepted its terms when they purchased


the property subject to the lease over three years ago; they


ratified and consented to the lease by signing a gas division


order after making a thorough inquiry into its status and by


accepting royalty payments with full knowledge of the terms


and conditions of the lease.


Because of lessee's refusal to voluntarily cancel,


plaintiffs seeks to compel determination of their interests


under RPAPL 1501. General Obligations Law Sec. 15-304 and


RPAPL 1501 must be read together; the plaintiffs have


standing.



FACTS AND CONTENTIONS



In 1974, plaintiff's predecessors in title,


(Turnquists"), signed an oil and gas lease that permits


pooling or unitization of the lease with others.


The lease was pooled; gas in paying quantities was


produced from a well on other land in the pool as of


November, 1986, paying some $50.00 to $150 annually in


royalties (more often amounts in the lower range).


Plaintiffs purchased the Turnquist property in 1989


subject to the lease. On November 14, 1989, after receiving


the November 8, 1989 letter from defendant explaining the


status of the lease, plaintiffs, along with Turnquists,


signed a transfer order providing for division of royalties.


Plaintiffs' grantor, Robert Turnquist swears that on


February 2, 1974, a Paragon Resources, Inc. land agent


carrying a number of printed "fill-in-the blank " oil and gas


lease forms, flashed a large amount of money and pressured


him and his wife to sign the lease. He says the agent told


him his neighbors were all signing up.


Plaintiff's alleged the contents of the lease were not


explained to Turnquist, nor was he given an opportunity to


consult anyone regarding the meaning of provisions of the


document; that Mr. Turnquist sophistication or knowledge


regarding oil and gas leases.


Turnquist was offered and accepted a payment of $113 for


leasing his 111 acres.


Between the 8th and 15th of February, 1974, the Paragon


agent obtained leases from five other neighbors of the


Turnquists, all of whom plaintiffs contend were pressed to


sign the same lease forms; defendant has not disputed these


allegations. (See defendant's Exhibits B & C).


All told, seven properties were included into a pool


comprising 570.77 acres.


For more than 9 years from the signing of the leases,


there was no drilling or exploration for oil or gas. Then,


within one month in the spring of 1993, drilling was


commenced and the well completed; but, there was no


production until November 1986, nearly 3 1/2 years later.


(See defendant's answers to interrogatories).


Turnquist indicated he was interested in obtaining the


free gas for heating and lighting but was denied free gas by


the lessees on the ground that the well was not on his


property.


He says he and other lessors thought the lease was for a


fixed period of ten years and had no understanding that a


well producing on someone else's property would extend their


leases indefinitely.



LEGISLATIVE POLICY GOVERNS OIL AND GAS LEASES



The Environmental Conservation Law regulates

 

the operation and development

of oil and gas properties to achieve

a greater ultimate recovery of oil and

gas, and to protect the correlative

rights of all owners and the rights of

all persons including landowners and the

general public. ECL 23-0301. (As

amended L.1987, c. 4101.) [emphasis

added].

 

The Appellate Division, 4th Dept., in Envirogas, Inc.


v. Consolidated Gas Supply, 98 AD2d 119, 469 NYS2d 499, 501-


502, in a gas lease case with lease terms similar to those in


the case here said:

 

" In jurisdictions where oil and gas

wells are more numerous than in New York,

it is the general rule that the lessee

must exercise its pooling authority in

good faith and as a prudent operator

(Kuntz, Oil and Gas, 48.3[g0, pp 217-

220; Boone v. Kerr-McGee Oil Industries,

Inc., 217 F.2d 63 (10th Cir.1954). The

rule should also be applied in New York

since every contract contains an implied

covenant of good faith performance and

fair dealing (VanValkenburgh, Nooger &

Neville v. Hayden Pub. Co., 30 NY2d 34,

45 330 NYS2d 329, 281 NE2d 142, Havel v.

Kelsey-Hayes Co., 83 AD2d 380, 382, 445

NYS2d 333)."

 

And in Doran Associates, Inc. v. Envirogas, Inc., 112


AD2d 766 (4th Dept. 1985), 492 NYS2d 504, 505-506, the


Appellate Division said:

 

"Additionally, we have previously held

that a lessee must exercise its pooling

authority in good faith and as a prudent

operator (Envirogas, Inc. v.

Consolidated Gas Corp., 98 AD2d 119, 469

NYS2d 499. . . 'The good faith/prudent

operator standard is not rendered

inapplicable merely because the owner of

the unitized parcels ratifies the pooling

agreement. ECL 23-0301 is intended to

protect not only the rights of interested

parties but those of the general public

as well.' (Emphasis added). See, also 77

NYJur2d Mines&Minerals, Sec. 81.



 

 

The Courts will read into a lease granting the exclusive


right to drill for and gather oil or gas . . . an implied


promise that the lessee will diligently continue to prospect


for oil, citing Reeland v. Moore Oil Co., 77 NYJur2d, Mines &


Minerals, Sec. 44, (1934) 242 AD 462, 275 NYS 489.


Courts are reluctant to allow the lessee to continue to


hold the land for any considerable length of time without


making a reasonable effort to develop it according to the


express or implied purpose of the lease, even though there is


a provision in the contract for the payment of a minimum


royalty. 77 NYJur2d Mines & Minerals, supra; 54 AmJur2d,


Mines&Minerals, Sections 142, 143.


"...there is an implied obligation on the part of the


lessee to develop the premises and mine the product within a


reasonable time." 77 NYJur2d Sec. 44, pp 283, 284.

 

 


77 NYJur2d, Mines&Minerals, Sec. 53, says:

 


"The rule that forfeiture or abandonment

is not looked upon with favor is not

applicable to an oil lease which

obligates the lessee to commence

operations to drill oil within a certain

time or in lieu thereof to pay a monthly

rental, since time is of the essence in

such contracts." (Citations omitted)...


"The oil is apt to be drained by the

sinking of wells on adjacent premises, so

it is important to the owner of the land,

who is to receive from the lessee as

royalty a part of the oil produced, that

the work should commence at the time

stipulated, in order that whatever oil

belongs to his premises may be obtained."

(Citations omitted).

 



The court perceives that the same considerations apply


in drilling for gas.


Unconscionable Contracts


Unconscionability has been incorporated into several of


the model statutes of the Uniform Commercial Code; see Sec.


2A-108, unconscionability under the Code or Leases, which in


Sec. 2A-103(1)(h) defines "Goods", excludes oil and gas


before extraction, but implicitly includes them after


extraction; in Section 1-112, unconscionable agreement or


term of contract in the Common Interest Ownership Act;


in Section 1-112 (Unconscionable Agreement on Term of


Contract) in the Planned Community Act; in Section 1-112


(unconscionable Agreement on Term of Contract) in the Model


Real Estate Cooperative Act; and in Section 1-105


(unconscionable Agreement on Term of Contract) in the Real


Estate Time-Share Act ( see Uniform Commercial Code, Uniform


Laws Annotated, Business and Financial Laws).


The trend of jurisprudence is to examine contracts in


terms of whether the parties had equal bargaining power;


".. use of deceptive or high-pressure sales techniques, and


confusing or hidden language in written agreement; see

AvildsenvPrystay (1991), 1st Dept) 171 AD2d 13, 574 NYS2d

535, app dismd 79 NY2d 841, 580 NYS2d 193, 588 NE2d 91.


"unconscionability may be found under

judicial power to annul contractual

obligation because of its

unconscionability was known at common law

and has been codified in CLS UCC 2-302;

pivotal finding which could trigger such

exercise of judicial nullification,

whether under Uniform Commercial Code or

common law, was where egregiously

oppressive contractual provision was

perceived to emanate from gross

inequality in bargaining power between

contracting parties, resulting in

contract "such as no man in his senses

and not under delusion would make on the

one hand, and as no honest and fair man

would accept on the other."


 

Also see Weissman v. Blue Cross of W.N.Y., 457 NYS2d 392

(Sup.Ct. 1982) pp. 395-396 where the Court said:

 

"When such an unequal bargaining

situation develops between the parties,

the courts will more carefully scrutinize

such agreements for the purpose of

avoiding unconscionable clauses. (6A

Corbin on Contracts Section 1376)

Unconscionability has been defined as

contractual overreaching, imposition,

oppressiveness or patent unfairness.

(Hume v. U.S., 132 U.S. 406, 10 S.Ct.

134, 33 L.Ed. 393 (1889)."



 

An unconscionable agreement will not be disturbed where


there has been ratification of it with knowledge of all its


terms after there is time for adequate consideration. See


cases cited in 21 NY Jur 2d, Contracts, Sec.141, page 547.



FREE GAS



The lease provided:


"6. If gas is found in paying quantities and conveyed

from the Premises and marketed, the Lessor may have

gas from the wells on the Premises not exceeding

200,000 cubic feet per year free of cost, for light

and heat on the Premises only, by laying the necessary

line and making connection at the Lessor's expense at

such point as may be designated by the Lessee, provided

said gas is measured by meter as in the case of other

consumers. . . ."


Plaintiffs claim they are entitled to free gas.


Defendant contends that free gas usage is reserved only to


the Lease in which the gas well is located; that a pooled


lease limits the free gas rights solely to the owner on whose


land the well or wells are located and not to any other


lessor in the pool.


There are no New York cases on this point, but, this


Court adopts the rationale in other gas and oil producing


jurisdictions that have held that a free gas clause in a


pooled lease entitles the Lessor to free gas usage.


The Kansas Supreme Court, in JacksonV.Farmer, 594 P.2d


177, 183, (1979), held that a free gas clause entitled the


Lessor of a lease within a unit to free gas for Lessor's


dwelling.


As in this Fredrickson case, the lease before the Kansas


court contained language that "any well drilled on such unit


shall for all purposes be a well under this Lease". The


Court held that language applicable to all provisions of the


lease, including the free gas clause.


The Arkansas Supreme Court in a similar case held


Lessors were entitled to free gas from the unit well not


located on their property. See Postv.TennecoOilCo, 648


W.W.2d 42 (1983).


That Court construed the language of the lease against


the defendant as an assignee of the drafter. It properly


reasoned that, because of the nature of gas deposits, gas was


actually being taken from Lessor's property, a fact that is


true in this case.


There is no language in the Fredrickson lease that would


limit free gas to the owner of property on which the well is


drilled. On the contrary, paragraph 4 of the lease


reads:

 

"Drilling, mining, or reworking operations upon,

or production of oil or gas from any part of any

such unit shall be treated, for all purposes

hereunder, as such operations upon or such

production from this lease".


 


Cases too numerous to mention recite that any ambiguity


in a written agreement should be construed most strongly


against the author. Although the rule does not have


application where a dispute occurs between parties claiming


under the same conveyance because each are entitled to the


benefit of the same rule of construction (NYJur2d, DEEDS,


Section 237 citing ColemanvBeach 97 NY 545), this Court


holds it applies to assignees of oil and gas leases who make


a business of, regularly deal with, and utilize form oil and


gas leases such as the one in this case.


If the lease is not subject to cancellation, this Court


holds that plaintiffs are entitled to free gas.



PAYMENTS IN DEFAULT UNDER PARA. 9 OF THE LEASE



Plaintiffs also call for cancellation of the lease


because of defendant's alleged failure to pay delay rentals


pursuant to the language of Paragraph 9.


That provisions states:

 

"This lease shall be in force for the

term of ten years from the date hereof,

and so long thereafter as the premises is

operated by lessee in search for a

production of oil or gas, and as

operations thereon continue for the

storage of gas or the removal of stored

gas, with the extension of term by

payment of rentals as hereinbefore set

forth; . . ."


 


This provision requires the lessee to operate on the


premises of the plaintiffs in search for a production of oil


or gas, "with extension of the term by payments of rentals


as hereinafter set forth" so that extension beyond the fixed


ten year term requires payment of delay rental unless a gas


well is paying quantities is found on plaintiff's premises.


In short, under the terms of paragraph 3, payment of


$28.25 for a period of three months is required, or $113 per


year. It is evident defendant has not made such payments,


presumably since November 1992 when gas was produced on other


property.


Defendant relies on the language of Sec. 4 which reads:

 

"Drilling, mining or reworking of

operations upon or production of oil or

gas from any part of any such unit shall

be treated for all purposes hereunder, as

such operation upon or such production

from the lease."



 

This general language does not address the specific


obligation and undertaking of Sec. 9 quoted above. Moreover,


Section 4 deals with allocating royalties according to the


ratio of the acreage of each lease to the total acreage, and


"treated for all purposes hereunder", may equally be read as


applying solely to Para. 4.


4 Williston on Contracts, Third Ed., Sec. 619, p. 743


provides:


"Where there is a repugnancy between general clauses and

specific ones, the latter will govern;"


Clearly, in the court's view, paragraph 9 is a specific


clause whereas paragraph 4 is a general clause which


defendant reads as over-riding any and all specific clauses.


The Court holds that paragraph 9 governs and defendant


has been in default of payment of delay rental for an


extended time and remains in default despite plaintiffs


having made due and timely demand for payment.


Moreover, if it may be said that the premises


particularly paragraph 4 and 9 are ambiguous, the ambiguity


must be resolved against the maker of the document.


This Court holds that it could not and should not


entertain cancellation of an interest in real property


without a hearing.


Accordingly, the Court adjourns the motion for summary


judgment pending a hearing on the issues, including


unconscionability, and, payments under paragraph 9, and free


gas.



THIS IS THE DECISION OF THE COURT. PLAINTIFF IS DIRECTED TO

PREPARE AND SUBMIT A PROPOSED ORDER TO THE COURT AND OPPOSING

COUNSEL.


Dated: October ,1995

Mayville, New York



___________________________

JOSEPH GERACE, J.S.C.