Hartman Ranch Co. v. Associated Oil Co.

Hartman Ranch Company (Hartman) (plaintiff) executed an oil-and-gas lease (the Hartman lease) to Joseph Dabney and others (collectively, Dabney). The Hartman lease provided for the drilling of 10 wells and stated that Hartman would receive a one-eighth royalty on all oil produced from the land. The Hartman lease was later assigned or subleased to Associated Oil Company (Associated) (defendant). The terms of the lease to Associated provided that Dabney would be paid a one-fifth royalty, from which Dabney would deduct the one-eighth royalty to be paid to Hartman. Dabney also reserved a right of reentry in case of breach of any stipulations in the lease. Associated expressly promised to assume and perform all the obligations and covenants in the parent lease from Hartman to Dabney. In addition to possessing the Hartman leasehold, Associated was also sublessee of land adjoining Hartman’s property and conducted extensive drilling operations on that land under a different lease. In March 1933, Hartman brought an action against Associated, claiming that Associated’s drilling operations on the adjacent property were draining oil from Hartman’s property. Hartman asserted that Associated’s failure to drill more wells on Hartman’s property was a breach of an implied covenant in the Hartman lease to protect the land from drainage. Hartman sought to recover the royalty that had been lost through the drainage and also sought forfeiture of the lease. A jury found for Hartman and awarded damages for the lost royalty. The trial court also entered a conditional decree of forfeiture of the lease. Associated appealed to the California Supreme Court, arguing that Associated, as sublessee, was not liable to Hartman, as the original lessor, for breaching any covenant in the parent lease. Hartman countered that Associated was an assignee, not a sublessee. After the supreme court concluded that there was an implied covenant in the Hartman lease for the party in possession of the Hartman leasehold to protect the land from drainage due to that party’s operations on adjoining land, the court considered the parties’ remaining arguments.