Horob v. Zavanna, LLC, 2016 ND 168

Background

John and Bernice Shae leased 1,057.72 acres (the Shae lease) in Williams County in 1969; lease primary term 10 years and extends so long as oil or gas is produced; lease includes a 60‑day cessation-of-production "unless" clause requiring additional drilling or reworking within 60 days after production stops.
The Rolfstad well (on a spacing unit including 21.61 net acres of the Shae lease) began producing in 1979; the well experienced production lapses including April–Sept 2004, Nov 2006–Jan 2007, and Dec 2010–Feb 2011.
In 1987 Wiser Oil executed a federal communitization agreement that committed 40 gross acres of the Shae lease to a 160‑acre communitized area including the Rolfstad well; the agreement deems production under the agreement to be production as to each committed lease and contains a 60‑day cessation clause tied to BLM notice.
Continental (operator since 2001) received a BLM notice Aug 30, 2004 directing restoration to production within 60 days and reported production resumed Sept 10, 2004; no BLM notices in the record for the later cessations.
Horob plaintiffs (successors to the Shaes) sued, arguing the Shae lease terminated under its cessation clause; defendants moved for summary judgment asserting production was timely restored and, alternatively, the communitization agreement (and plaintiffs’ acceptance of royalties) preserved the lease.
The district court granted summary judgment for defendants; the Supreme Court affirms, holding the lease was preserved by the communitization agreement even though the Shae lease’s cessation clause was triggered in 2004.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the Shae lease terminated under its 60‑day cessation‑of‑production clause after the 2004 lapse	Shae lease terminated because production ceased for >60 days and no drilling/reworking commenced within 60 days	Cessation was temporary and operator had reasonable time/maintenance to restore production; clause not triggered	Court: Cessation clause was triggered (temporary‑cessation doctrine inapplicable to a clear "unless" clause)
Whether the federal communitization agreement preserved the Shae lease despite the 2004 lapse	Plaintiffs: not bound by communitization because they were not parties; if bound, only the committed 40 acres are preserved	Defendants: Shae lease’s pooling clause authorized Wiser to enter the communitization agreement; production under the agreement is production as to the lease	Held: Plaintiffs bound via their lease pooling clause; because BLM notice and operator compliance restored production under the communitization agreement, the entire Shae lease remained in effect
When the 60‑day cure period runs under the communitization agreement	Plaintiffs: 60 days should run from actual cessation, not BLM notice	Defendants: Agreement (and regulation) make the 60‑day period run upon BLM notice directing resumption	Held: Under the communitization agreement and 43 C.F.R., the 60‑day period runs upon BLM notice; Continental complied with BLM notice in 2004
Whether only the 40 committed acres remain and the rest of the lease severed	Plaintiffs: statute on segregation/unitization requires segregation of committed vs. noncommitted acres	Defendants: Communitization (not unitization) and lease pooling clause preserve the entire lease; no Pugh clause severing noncommitted acreage	Held: Communitization and pooling clause keep the whole lease in effect; segregation principles for unit plans do not compel severance here

Key Cases Cited

Poppe v. Stockert, 870 N.W.2d 187 (N.D. 2015) (summary judgment standard and review)
Tank v. Citation Oil & Gas Corp., 848 N.W.2d 691 (N.D. 2014) (contract interpretation governs by parties’ intent)
Serhienko v. Kiker, 392 N.W.2d 808 (N.D. 1986) (an "unless" cessation clause is a special limitation that causes automatic termination if its conditions are not met)
Greenfield v. Thill, 521 N.W.2d 87 (N.D. 1994) (doctrine of temporary cessation and equitable allowance of reasonable time where no specific cessation clause)
Egeland v. Continental Res., Inc., 616 N.W.2d 861 (N.D. 2000) (governmental pooling/unitization ordinarily does not divide a lease; production anywhere in pooled unit can hold entire lease)
Bedore v. Ranch Oil Co., 805 N.W.2d 68 (Neb. 2011) (where parties contract a specific time for cessation cure, that agreed period controls over common‑law reasonable‑time doctrine)