DEBTOR CASE NO. 91-60168





This matter is before the Court to resolve the issue of whether the debtor in possession ("the DIP") may assume certain oil and gas leases with L. Ed Bray, Elmer Walker and Lorene Walker, William Brooks and Dorothy Brooks, and Homer Walker. These lessors maintain that the DIP was in default, and that the leases therefore terminated and cannot be assumed. All parties have submitted briefs in support of their respective positions.

1. The Bray Leases.

As concerns Bray, there are three leases in dispute. Each of these leases contains a termination provision which states as follows:

23. It is understood and agreed that, in the event Lessee should default in any payment provided for herein and remain in such default for a period of Thirty (30) days from the date when said payment becomes due, or should Lessee be notified in writing of any default by Lessor, then, in either event, at the option of the Lessor, this lease shall cease and terminate and be of no further effect.

Bray contends that he exercised his right of termination when the monthly royalty payment for gas consumed or sold went into default. Bray has filed a copy of a letter dated October 26, 1989, addressed to the DIP which states in part: "Please be further advised that this letter constitutes notice to you of default, as specified in paragraph 23 of each of the above-mentioned leases, and based thereon, said leases have ceased and terminated and are of no further effect." A letter from the DIP's attorney dated November 15, 1989, denies that the DIP was in default.

Bray further contends that approximately one month after the termination letter was sent, he returned to his property to lock the gas pipelines from the wells. He states that he apparently missed a lock on one of the wells, that the gas continued to flow from that well in December 1989 and January 1990 until he discovered that fact on January 17, 1990, and that on that date he locked the well. Bray further states that he accepted payments of $35.26 and $50.97 for gas removed from the well in December 1989 and January 1990, respectively. It is his position that these payments were accepted for gas wrongfully taken after the leases were terminated.

The DIP's position in regard to termination of the Bray leases, as it is with all the other leases, is that forfeiture is disfavored under the law. Generally speaking, this is indeed the case. In Carlson v. Kentucky Ridge Coal Co., 112 F.Supp. 371 (E.D.Ky. 1953), the court held that "[c]ontract provisions for forfeiture of valuable rights or interests are regarded with such disfavor that when sought to be applied they are strictly construed against parties seeking to invoke them." At p. 374.

The court went on to point out that this rule is especially applicable when the default is related to payment of rent or royalty "if payment is made or in good faith tendered before loss or substantial damage is suffered on account of the delinquency." Id. The lessor in Carlson purported to invoke the forfeiture provision of a mineral lease, although the lease provided that it should be invoked by both parties, and when the lessee attempted to tender royalty payments within the thirty days allowed for payment, she refused to accept the checks.

The facts are, of course, different in the within matter. Copies of correspondence filed herein indicate that the DIP owed $410.92 in royalties for April through July (presumably 1989), and that the only payments tendered were the checks for $35.26 in March 1990 and $50.97 in April 1990, well after Bray sent his letter terminating the lease. In Bowling v. Shearn Coal Company, Inc., Ky.App., 600 S.W.2d 462, 464 (1977), the court held that where a coal mining lease contained an express self-executing forfeiture clause and where the lessees made late payments and defaults which violated the terms of the forfeiture clause, the lessees, having failed to comply with the conditions of the lease, had no more rights under it.

The DIP does not deny that the Bray leases provide specifically for termination upon default, but argues that the letter of October 26, 1989, was ambiguous as to termination. This Court does not agree; the language quoted above could not be more clear. That expression of Bray's intent notwithstanding, the DIP cites Ledford v. Atkins, Ky., 413 S.W.2d 68 (1967) in support of its position that the lease should not be subject to forfeiture for delay in paying royalties. This case is based, however, on "extraordinary circumstances" (assignee of lessee was in a coma for 23 days at time payments were to be made), and such "extraordinary circumstances" are not present here.

The DIP also brings up various negotiations between the DIP and Bray and one or more of his corporate entities, concerning other, prior business dealings. The DIP has not, however, demonstrated that these negotiations are germane to the issue of whether or not the leases were terminated, as the leases are only between the DIP and Bray personally.

The more difficult issue is whether Bray's acceptance of the two payments after October 26, 1989, constitutes a waiver of the termination. Waiver has been upheld in numerous Kentucky decisions. The court in Walter v. Ashland Oil & Refining Co., Ky., 187 S.W.2d 425 (1945) stated that

...in every instance in which the lessee (sic) has accepted the past due rental, or in which he has suffered the lessee to drill after the time had expired within which the lessee was required to drill, we have accepted the construction adopted by the parties and applied the rules of waiver and estoppel.

At pages 426-427. See also Great Western Petroleum Corporation v. Samson, Ky., 234 S.W. 727 (1921). However, the waiver in cases such as these occurred when the lessor accepted late rental payments after a breach had occurred, but before the lessor took action to terminate the lease. This Court agrees with Bray that he could not waive his right to terminate by the acceptance of the two checks, when he had already exercised that right. This Court is therefore of the opinion that Bray did terminate his leases with the DIP.

2. The Homer Walker Lease.

This lease containes a specific default provision at paragraph 23, as in the Bray leases above. Walker states that he forwarded notice of default to the DIP by letter dated November 27, 1989. The DIP has not alleged waiver concerning this lease. The same reasoning as was applied to the Bray leases concerning the lessor's right to terminate is applicable here. It is the opinion of this Court that Homer Walker exercised his right to terminate under the express provisions of the lease.

3. The Elmer and Lorene Walker Lease.

There is apparently some confusion over the identity of the lease in issue here. The DIP states that it moved to assume a lease dated May 11, 1985, and has attached a copy of a lease so dated. The Walkers' termination letter of November 27, 1989, refers to a May 10, 1985, lease. If there is a May 10, 1985 lease, the Court does not have a copy of this lease before it. If the lease which the DIP seeks to assume (the May 11, 1985 lease) is the one in issue, then resolution of the question of whether it was terminated is complicated by the fact that it does not have a specific forfeiture provision.

The general rule in Kentucky is, "...no forfeiture will be decreed for a breach of the terms of the lease in the absence of a forfeiture clause, but that the parties will be left to their legal remedies for damages of the breach." Continental Fuel v. Haden, 206 S.W. 8, 10 (Ky. 1918). See also Kelley v. Ivyton Oil & Gas Co., 265 S.W. 309 (Ky. 1924), which followed the rule set forth in Continental Fuel. The Kelley court stated that "...a forfeiture of the lease will not be decreed because of arrears of rent or royalty except upon clear language in the lease providing therefor." Id., at page 311. This is the DIP's position, with which this Court agrees.

4. The Brooks Lease.

The Brooks lease, like the Elmer and Lorene Walker lease discussed above, lacks a specific forfeiture provision. The same reasoning therefore applies to prevent termination.

In consideration of all of the foregoing, it is therefore the opinion of this Court that the DIP may not assume the Bray leases or the Homer Walker lease, and that it may assume the Elmer and Lorene Walker lease and the Brooks lease. An order in conformity with this opinion will be entered separately.


By the Court -







Copies to:


James W. Gardner, Esq.

Ben K. Davis, Esq.

Dean W. Bucalos, Esq.