Opinion
G030939
11-3-2003
JOSEPH PALLADINO, Plaintiff and Respondent, v. SOUTH COAST OIL CORPORATION, Defendant and Appellant.
Haight, Brown & Bonesteel, Frank C. Brucculeri; and Janet Harris for Defendant and Appellant. Rodi, Pollock, Pettker, Galbraith & Cahill and Allan E. Ceran for Plaintiff and Respondent.
Defendant South Coast Oil Corporation (South Coast) appeals from a summary judgment declaring its oil and gas lease forfeited. South Coast contends there was a triable issue of material fact as to whether it began to remedy the purported breaches of the oil and gas lease within 30 days of receipt of the notice of default from the lessor. We see no triable issue and affirm.
I
FACTS
A. Lease
This case arises out of an Oil and Gas Lease dated September 30, 1954, pertaining to certain property located in Huntington Beach. Joseph Palladino is the current lessor under the lease and South Coast is the current lessee. The lease was intended to remain in effect for the period of time the well remained producing. The lessee was required to pay one-sixth of its production as a royalty, with a minimum royalty of $150 per month.
This case centers on paragraph 21 of the lease, which provides: "Upon the violation of any of the terms or conditions of this lease by the Lessee and the failure to begin to remedy the same within 30 days after written notice from the Lessor so to do, then, at the option of the Lessor, this lease shall forthwith cease and terminate, and all rights of the Lessee in and to said land be at an end . . . ."
B. Notice of Default
Palladino sent a letter dated April 19, 2000 to the president of South Coast, Stephen Harris. In that letter, Palladino asserted that South Coast had failed to comply with a number of lease requirements. First, he claimed he had not received any royalty checks since December 1998 and pointed out that South Coast had not even been diligently paying the $150 minimum monthly royalty. Palladino requested payment of all past due sums.
Second, Palladino requested that a meter be installed on his well to determine how much oil it was producing and that his oil be tested to determine its quality. Third, he requested that South Coast deed over certain abandoned property where some preexisting tanks were once located and demanded certain accounting information. Finally, he sought a copy of South Coasts current insurance policy for the property, naming Palladino as an additional insured.
In conclusion, Palladino stated: "Therefore, within the next 30 days, please send the checks, copy of the insurance policy, and all of the other documents requested
. . . . As for the installation of the meter and testing of the oil from my well, you must begin the installation and testing within the next 30 days. If you do not comply with these demands within 30 days, you will have breached . . . the Lease."
C. Response
South Coast received the letter on May 15, 2000. It sent a check to Palladino on June 20, 2000, more than 30 days after receipt of Palladinos letter. The check, in the amount of $ 1,841.41, was dated June 20, 2000 and contained a note stating: "Royalty Nov 98 — Sept 99[.]" South Coast admits that when Palladino received this check, royalties for the period of October 1999 through April 2000 remained due and unpaid. Palladino did not cash the check.
D. Notice of Termination
On July 13, 2000, counsel for Palladino sent a letter to Harris. That letter stated, inter alia, that South Coast was in breach for having failed to "properly respond to Mr. Palladinos written request for information within the allotted 30-day period and because South Coast failed to perform under other provisions of the Oil Lease . . . ." The letter further stated that it constituted both a notice of material breach and a notice of termination of the lease, per paragraph 21 thereof.
E. Litigation Proceedings
Palladino filed suit in November 2000. In the first amended complaint, he asserted causes of action for breach of contract, specific performance, fraud, accounting, declaratory relief and ejectment.
South Coast sent Palladino another check, dated December 20, 2000, in the amount of $2,605.77. That check contained a note stating: "Royalty Nov 99 — June 2000[.]" Palladino did not cash the check.
In February 2002, Palladino filed a motion for summary adjudication of the fifth cause of action for declaratory relief. On May 15, 2002, the court entered summary judgment in favor of Palladino and against South Coast. It adjudged the lease to be terminated effective July 13, 2000. It also ordered South Coast to pay Palladino $75,000 in stipulated damages. South Coast appeals.
II
DISCUSSION
A. Summary Judgment Review
On review of a summary judgment, we "examine the record de novo and independently determine whether [the] decision is correct. [Citation.]" (Colarossi v. Coty US Inc. (2002) 97 Cal.App.4th 1142, 1149.) In undertaking our independent review of the evidence submitted, we apply "`the same three-step process required of the trial court: First, we identify the issues raised by the pleadings, since it is these allegations to which the motion must respond; secondly, we determine whether the moving partys showing has established facts which negate the opponents claims and justify a judgment in movants favor; when a summary judgment motion prima facie justifies a judgment, the third and final step is to determine whether the opposition demonstrates the existence of a triable, material factual issue. [Citations.]" (Waschek v. Department of Motor Vehicles (1997) 59 Cal.App.4th 640, 644.)
"Under summary judgment law, any party to an action, whether plaintiff or defendant, `may move the court `for summary judgment in his [or her] favor on a cause of action . . . or defense (Code Civ. Proc., § 437c, subd. (a)) — a plaintiff `contend[ing]
. . . that there is no defense to the action, a defendant `contend[ing] that the action has no merit (ibid.). The court must `grant[] the `motion `if all the papers submitted show that `there is no triable issue as to any material fact (id., § 437c, subd. (c)) — that is, there is no issue requiring a trial as to any fact that is necessary under the pleadings and, ultimately, the law [citations] — and that the `moving party is entitled to a judgment as a matter of law (Code Civ. Proc., § 437c, subd. (c))." (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843.)
"In moving for summary judgment, a `plaintiff . . . has met his [or her] `burden of showing that there is no defense to a cause of action if he [or she] `has proved each element of the cause of action entitling him [or her] `to judgment on that cause of action. Once the plaintiff . . . has met that burden, the burden shifts to the defendant . . . to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto. . . . (Code Civ. Proc., § 437c, subd. (o )(1).)" (Aguilar v. Atlantic Richfield Co., supra, 25 Cal.4th at p. 849.)
B. Palladinos Showing
The first amended complaint contained causes of action for breach of contract, specific performance, fraud, accounting, declaratory relief and ejectment. However, the motion for summary adjudication pertained only to the fifth cause of action, for declaratory relief. It addressed only the issue of whether South Coasts failure to cure its default with respect to the payment of royalties resulted in termination of the lease.
As noted at the outset, the lease required the lessee to pay one-sixth of its production as a royalty, with a minimum royalty of $150 per month. In support of the motion for summary judgment, Palladino filed a declaration stating that South Coast had made no royalty payments whatsoever between December 1998 and April 19, 2000. In its opposing separate statement of undisputed and disputed material facts, South Coast admitted this to be true. No payments had been made during this time period even though, as Harris stated in his declaration in support of South Coasts opposition, the well had been in operation since 1954 "with no cessation of production." Thus, Palladino showed a breach of the lease.
The lease provides that upon violation of any terms thereof and the lessees failure to begin remedy of the same within 30 days after written notice from the lessor, the lease shall terminate at the option of the lessor. South Coast admitted that it did not respond to Palladino within 30 days after receipt of the notice of default and that it did not send a check to Palladino until June 20, 2000. Thus, Palladino had a right to terminate the lease because South Coast failed to begin to cure the monetary default within the 30-day period.
Palladino met his burden to prove each element of the cause of action for declaratory relief by showing a breach of the lease and the right of termination. The burden then shifted to South Coast to show that a triable issue of material fact existed as to that cause of action or a defense thereto.
C. South Coasts Showing
(1) "Begin to remedy"
In opposition to the motion for summary judgment, South Coast argued that it was not required to remedy the purported breaches within 30 days of receipt of notice but rather that, under paragraph 21 of the lease, it need only begin to remedy the breach within that 30-day period of time. Moreover, South Coast argued it was not even necessary for it to provide a response to Palladino within the 30-day period.
Most importantly, South Coast asserted that it had indeed complied with the lease provision by beginning to remedy the purported breaches within the 30-day period. Harris, in his declaration in support of the opposition, stated that he began to effectuate remedies by taking the following actions: (1) he "hired professional landman, Alfred Crisler, Jr. to immediately investigate whether [South Coast] had breached any terms and conditions of the Lease" and "instructed Mr. Crisler to calculate the amount of royalty due based on [South Coasts] records;" (2) he "immediately conferred with [South Coasts] attorneys to investigate whether [South Coast] had indeed breached" the lease; and (3) he "immediately began to investigate Plaintiffs concerns so that they could be addressed as soon as possible."
In other words, South Coast argued it had done all it needed to do to comply with the 30-day lease provision by investigating the claims. It did not need to respond or to perform or to demonstrate any tangible effort to cure the purported breach, i.e., nonpayment of royalties. South Coast did not think it even needed to make a token payment, a partial payment, within the 30 days, even though it admitted that it had not made a payment in 16 months. It did not even tender the $150 per month minimum payment for the months no payment was made. South Coast thought it was enough to start contemplating what payment it might make, without even notifying Palladino that it would take some time to review records and figure out the amount due. Following this logic, South Coast could have spent six months in silence pondering the matter, without any communication or offer of payment to Palladino.
(2) Modification of payment schedule
South Coasts next excuse was the assertion that it simply was not in breach of the royalty payment provisions, despite their plain language. In his declaration in opposition to the motion, Harris stated he believed there was no breach of the royalty payment requirement because the "payment schedule had been modified by Plaintiffs past acceptance of royalty checks which had been issued on an intermittent basis." He explained that, "We have paid royalty for 8 years on a less frequent basis than called for in the Lease, and Mr. Palladino has continued to accept the payment. . . . I explained to him that we would pay him royalty on a more frequent basis (twice yearly) if he insisted, but that we preferred to issue checks less frequently because the amounts in question were not that much. He did not insist on more frequent payments, and until I received his April 2000 letter, I did not know that he was concerned about royalty payments on a less-than-frequent basis."
As Palladino pointed out in his reply to the opposition, Harris declaration is lacking in any assertion that Palladino ever agreed to a modified royalty payment schedule. Harris only declared that he had told Palladino he would not pay timely. He provided no evidence to the effect that Palladino had ever agreed, either orally or in writing. Furthermore, Harris did not even attempt to articulate what any modified payment schedule would have been. He only indicated that it would have been something less than stated in the lease, and even something less than twice annually, unless Palladino really insisted on being paid more often. In other words, Harris asserts that South Coast was entitled to pay whenever it chose. Since South Coast admits to having made no payment in 16 months, but says at the same time that it was not in breach of the purportedly modified payment schedule, South Coast must necessarily argue that the lease was modified so as to permit payments in intervals greater than once every 16 months.
South Coast cited no legal authorities addressing the circumstances under which an oil and gas lease, or for that matter any lease or contract, could be modified by the lessors or obligees acceptance of untimely payments. It also cited no authorities supporting the notion that because Palladino had exercised forbearance in not declaring a default earlier, he was precluded from doing so later. Having provided no evidence of any explicit agreement on Palladinos part to modify the lease payment schedule, and no authority to the effect that failure to enforce the written payment schedule earlier constituted agreement to modification, South Coast raised no triable issue as to a lease modification.
(3) Minimum monthly royalty payment
South Coast had one more argument, with respect to the $150 minimum royalty payment requirement. Harris declared a belief that the $150 per month minimum payment provision in the lease was "ambiguous as to whether it referred to rentals or to royalty . . . ." He further stated there was no breach of that provision in any event because over an 86-month period from 1992 through July 20, 2000 the monthly payment had averaged $272.12, so the monthly requirement had been satisfied.
Neither of these arguments holds water. The provision in question, contained in paragraph 38 of the addendum, plainly states: "From and after the date of a producing well being brought in on the demised premises, the minimum royalty paid by Lessee to Lessor shall be not less than $150.00 per month." The language could not be more clear. It strains credulity to argue that such plain language actually means that there is no monthly minimum royalty at all and that the lessee can go months, if not years at a time without paying a dime, as long as payments average more than $150 per month over a period of seven years. A minimum monthly payment is just that — the minimum amount to be paid each month — not a guarantee as to the minimum total amount to be paid over the life of a lease of potentially perpetual duration.
(4) No triable issue
All in all, South Coast admitted it did not make payments for 16 months before the notice of default was received, made no payment within the 30-day period, and had no communication with Palladino within the 30-day period. South Coast did not meet its burden to raise a triable issue of material fact as to whether it complied with the obligation to begin to remedy the default within the 30-day period.
Harriss statements to the effect that South Coast began investigating whether it should pay and how much, in the 30-day period, are insufficient. A remedy of a monetary default requires payment, not cogitation on the matter. Likewise, Harriss self-serving statements as to a purported modification of the payment schedule do not raise a triable issue of fact, for the reasons previously stated.
D. Oil and Gas Lease Forfeitures
In his motion for summary judgment, Palladino cited several cases in which oil and gas lease forfeitures were upheld. In its opposition to the motion, after having made its effort to raise triable issues of fact, South Coast wrapped up its argument by stating that the authorities Palladino had cited regarding the termination of oil and gas leases were inapplicable and that the law abhors a forfeiture, even with respect to oil and gas leases.
It is true that most of the cases Palladino cited had to do with forfeitures triggered by the failure to drill or to maintain operations, not forfeitures on account of the failure to pay royalties. (See e.g., Baldwin v. Kubetz (1957) 148 Cal.App.2d 937; Danker v. Lee (1955) 137 Cal.App.2d 797; Taylor v. Hamilton (1924) 194 Cal. 768.) This does not mean that an oil and gas lease cannot be forfeited for other reasons as well.
In Martin v. Pacific Southwest Royalties (1940) 41 Cal.App.2d 161, 165, the forfeiture of an oil and gas lease was upheld based on the lessees failure to pay a royalty equal to one-sixth of all its production, required to be paid under the lease as a monthly rental. South Coast contends Martin is distinguishable because the forfeiture clause in the lease at issue in that case specifically referred to "the payment of rentals or royalties" and did not contain the "begin to remedy" language present in the lease before us. Those distinctions are not material, however. The court in Martin did not suggest that the case turned upon the fact that the forfeiture clause specifically referenced the breach of the requirement to pay rentals or royalties or that a general reference to "the violation of any of the terms or conditions of this lease" would have been insufficient. As for the distinction in what the lessee is required to do within 30 days, i.e., "to remedy" versus "to begin to remedy," it does not matter. With respect to the overdue royalty payments, South Coast did not do either one.
South Coast draws our attention to Kelly v. Ochs (1947) 78 Cal.App.2d 272 and El Rio Oils Ltd. v. Chase (1949) 95 Cal.App.2d 402. In Kelly, the court denied an oil and gas lease forfeiture where the undisputed evidence showed that the lessee began to remedy the defaults within the period required. In that case, the lessor had served a notice of default with respect to several defaults under the lease. Within the requisite period of time, the lessee mailed the lessor a check for overdue royalty payments and also made efforts to remedy the non-monetary defaults. However, in the case before us, unlike the situation in Kelly, the lessee, South Coast, did not make any royalty payment within the requisite time period and only the monetary default was at issue on the motion for summary adjudication.
The court in El Rio Oils Ltd. v. Chase, supra, 95 Cal.App.2d 402 also denied an oil and gas lease forfeiture. There, on receipt of the notice of default, the lessee immediately filed a declaratory relief action, because the amount of the royalties due was in dispute. The lessee interpreted the lease to permit it to charge against royalties otherwise owing a certain amount of its overhead and expenses incurred in injecting distillate into the wells for the purpose of increasing production. The court found that the lessee was honest in its contentions. Moreover, the lessee had paid into the court the amount the lessor had demanded in the notice of default. The court determined that a forfeiture, under the circumstances, would be harsh and inequitable.
In contrast, South Coasts excuse for its failure to pay royalties for 16 months was that it had told Palladino previously that it did not want to comply with the payment schedule set forth in the lease. The equities hardly match up.
Several of the cases the parties cite noted the general rule to the effect that the law abhors a forfeiture. At least one, Martin v. Pacific Southwest Royalties, supra, 41 Cal.App.2d at page 169, stated flatly that "it is to be noted that the general rule that the law abhors forfeitures is not applicable to oil and gas leases. [Citations.]" Another, Baldwin v. Kubetz, supra, 148 Cal.App.2d at page 948, stated: "`While forfeitures are not ordinarily favored by courts of chancery, there is an exception when it is against equity to permit a lessee to hold possession of property indefinitely without performing any of the duties required of him by his contract." South Coast asserts the exception to the rule should be applied only in instances in which the lessee has failed to commence or continue drilling operations, but not in situations where the lessee has defaulted in the payment of royalties. (See El Rio Oils Ltd. v. Chase, supra, 95 Cal.App.2d at pp. 412-213 [exception to rule has been applied where lessee failed to drill wells].) Martin v. Pacific Southwest Royalties, supra, 41 Cal.App.2d 161 is most nearly on point and we will apply it in this case.
III
DISPOSITION
The summary judgment is affirmed. Respondent shall recover his costs on appeal.
WE CONCUR: SILLS, P. J., RYLAARSDAM, J.