Novy v. Woolsey Energy Corp., Case No. 110,599 (June 27, 2014) (unpublished)

In Sieker v. Faye M. Stephens Trust, 49 Kan.App.2d 183, 309 P.3d 1 (2013), the Kansas Court of Appeals applied the Kansas Deep Horizons Act (K.S.A. § § 55-223 – 55-229) (the "Act") and ordered cancellation of an oil and gas lease as to all but 10-acres surrounding the existing producing well on the lease based on a claimed breach of the lessee's implied duty to develop an oil and gas lease. In that case, an oil and gas lease covering 160-acres was granted in 1950 and a producing well was drilled on the lease 1951. No other drilling had occurred on the lease. In 2013, the lessor sued claiming that the lease should be cancelled because no drilling had occurred, others were interested in exploring the land, and that the lessee had admitted that it was not in a position to conduct further development.

The Court of Appeals in Sieker relied upon the Act to shift the burden of proof to the lessee to prove that it had not breached its duty to fully explore and develop the lease, found that the lessee had not satisfied that burden, and cancelled the lease as to all put the 10-acres surrounding the producing well. Since that decision was issued, counsel representing lessors have relied upon the decision in Sieker to shift the burden of proof in such cases to the lessee, and for the proposition that a breach of the implied covenant can be proven by simply an unwillingness to drill additional wells regardless of the rational for that decision.

A fundamental flaw underlying the court's opinion in Sieker was its reliance upon the Act to shift the burden of proof to the lessee. The Act, by its terms, only applies to undeveloped portions of the lease beneath the "base of the deepest producing formation." K.S.A. § 55-227. The Act is a statutory implied covenant to explore unexplored depths when leased land is held by production, and shifts the burden of proof to the lessor to show that it has complied with that covenant.

Recently, the Kansas Court of Appeals issued a decision rejecting the application of the Act to a breach of implied covenant to develop case. Novy v. Woolsey Energy Corp., Case No. 110,599 (June 27, 2014) (unpublished). In Novy, plaintiffs relied upon the Act to shift the burden of proof to the defendant lessee and failed to introduce any evidence to support its claims other than the evidence necessary to invoke the application of the Act. The trial court granted judgment as a matter of law in favor of the lessee, and that decision was affirmed by the Court of Appeals.

In a departure from its prior ruling in Sieker, the Court of Appeals stated that "it was not error for the district court to place the burden of proof upon the Novys to show that the oil and gas lease was breached . . ." Moreover, the Court of Appeals rejected the lessors' claim that a breach of the implied covenant to develop can be shown based solely on the fact that the lessee does not desire to drill additional wells on a lease – "the lessor must show more than just the fact that the lessee has refused to drill additional wells to sustain the burden of proof that the lessee breached the implied covenant to prudently develop."

Unfortunately, the Court of Appeals' decision in Novy was not published. As such, that decision "is not binding precedent," and arguably does not alter the prior decision in Sieker. Ks. App. Rules, Rule 7.04(g)(2)(A). However, on July 10, 2014, a motion to publish was filed by the lessee in the Novy case. That motion is pending and, if granted, the Court of Appeals' decision in Novywill become binding precedent and hopefully corrects the misapplication of the Act by the Court in Sieker.