Judge: James C. Chalfant, Case: 22STCV17451, Date: 2022-08-16 Tentative Ruling

Case Number: 22STCV17451    Hearing Date: August 16, 2022    Dept: 85

            Plaintiff Guzman Energy, Inc. (“Guzman”) moves for a preliminary injunction enjoining Defendants Future Growth LLC (“Future Growth”) and 621 Two LLC (“621 Two”) from impairing Guzman’s access to and use of two oil and gas wells known as the Leitch and Sutherland Wells and their associated equipment and facilities located on real property at 621 West Rosecrans Avenue, Los Angeles, California (“Property”).

            The court has read and considered the moving papers, opposition,[1] and reply, and renders the following tentative decision.

            A. Statement of the Case

            1. Complaint

            Plaintiff Guzman commenced this proceeding on May 26, 2022, alleging causes of action for (1) quiet title, (2) private nuisance per se, (3) intentional interference with prospective economic advantage, and (4) declaratory relief.  The Complaint alleges in pertinent part as follows.

            On March 29, 1938, Louise A. Leitch (“Sutherland”, her subsequent last name) leased to R.E. Bering (“Bering”) the right to explore for and produce oil from specific property in Los Angeles County (“Leitch Lease”).  Pursuant to this right, Bering drilled an oil and gas well on the property (“Leitch Well”). 

On March 6, 2017, Forster Oil Company (“Forster”) assigned these rights to Guzman (“Leitch Assignment”).  Frances Norton (“Norton”) consented to this assignment as lessor of the Leitch Lease. 

            On March 12, 1954, Sutherland leased to Zephyr Oil Company (“Zephyr”) the right to explore for and produce oil from specific property in Los Angeles County (“Sutherland Lease”).  Pursuant to this right, Zephyr drilled an oil and gas well on the Property (“Sutherland Well”).  On March 6, 2017, Forster assigned these rights to Guzman (“Sutherland Assignment”).  The lessor of the Leitch Lease consented to this assignment.

              Section 32 of the Sutherland Lease requires that all surface locations and equipment be on adjacent land.  On September 15, 1953, the lessees of both the Leitch and Sutherland Leases obtained an easement (“Easement”) on a surface location with the southern 75 feet and eastern 75 feet of the land covered by the Leitch Lease for a well, equipment and buildings for said well, and ingress and egress thereto.  The Easement was for one year, plus for however long afterwards that the lessees continued drilling, redrilling, deepening, or repair operations.  Guzman is the current record owner of this Easement and uses it for the Sutherland Well.

            Under these leases and Easement, Guzman built the necessary equipment and facilities (“Oil Facilities”) on a portion of the property at 621 West Rosecrans Avenue, Los Angeles, CA (“Property”).  Through a grant deed from October 27, 2014, 621 Two owns the surface estate of the Property subject to the Leitch Lease and Easement.

            On January 29, 2021, Guzman received a letter from Future Growth’s purported predecessor-in-interest, Cindy A. Shepard Management Trust (“Shepard Trust”), asserting that it was assigned interests in the Leitch Lease and Sutherland Lease.  The letter included a 2018 quitclaim deed on which Future Growth relies.  The language of this quitclaim deed is unclear and ambiguous as to the specific interest conveyed, and Guzman interprets it as only conveying the royalty interest to the leases, which is a sixth of the difference between revenue from selling crude oil and property taxes.  The January 29, 2021 letter included a copy of a Los Angeles County Assessor Change in Ownership Statement (“Change in Ownership Statement”) indicating that Future Growth acquired a 100% revenue interest and 100% working interest in the Leitch Lease and the Sutherland Lease.

            Because the quitclaim deed and Change in Ownership Statement raise legitimate uncertainty of Future Growth’s interest acquired in the leases, on February 9, 2021 Guzman sent a letter to Future Growth requesting clarification.  Pending resolution of this issue, Guzman has segregated and held all royalties on production from the Leitch Lease and the Sutherland Lease since November 2020. 

            On November 22, 2021, Guzman sent a letter to Future Growth asking for documentation and a completed IRS Form W-9 prior to issuing any royalty payments, as Guzman believes the law requires. 

Future Growth did not comply, instead sending a letter to Guzman on December 20, 2021 alleging Guzman’s failure to pay royalties on production from the leases since November 2020.  A follow-up letter on December 21, 2021 asked Guzman to allow Future Growth to inspect its records to determine the amount of royalties purportedly owed.  As Guzman was only required to permit the lessor to do so, and it did not know if Future Growth held valid title to the lessor’s interest, Guzman did not comply.

            Guzman believes the leases are in full effect.  Guzman is producing oil from both wells and is willing to release royalties and provide accounting once Future Growth provides the documents requested and/or required by law.  A refusal to release the royalties until then is a common industry practice and does not constitute a refusal or failure to pay royalties amounting to a default under the leases.

            As a courtesy, Guzman provided 621 Two and Future Growth’s managing member, Peter Starflinger (“Starflinger”), notice regarding planned operations prior to accessing the Easement and Leitch Lease lands for maintenance and oil-gathering purposes.  Starflinger responded that it will not allow Guzman Energy on the Easement and Leitch Leased Lands and would only provide access to permit Guzman to comply with lease-end obligations.  Defendants have used vehicles to block access gates to the wells and Oil Facilities and Guzman cannot service or maintain them or move the collected oil offsite.  The Sutherland Well has ceased operations, likely because of rod failure and gas pressure can cause a blowout unless Guzman fixes that soon.

            Guzman seeks a judgment (1) that it is the record owner of the lessee’s interests in the leases, (2) that the leases and Easement are in full force and effect, (2) as to the parties’ rights, duties, and responsibilities, and (4) enjoining Defendants from engaging in any activities that impair Guzman’s access to and use of the Easement and Leitch Leased Lands to operate and maintain the wells and Oil Facilities.  Guzman also seeks actual and exemplary damages, and attorney’s fees and costs.

            2. Course of Proceedings

            On May 26, 2022, Guzman filed an ex parte application for temporary restraining order (“TRO”) and order to show cause re: preliminary injunction (“OSC”) enjoining Defendants from impairing Guzman’s access to and use of the oil and gas wells and the Oil Facilities.  The court denied it for lack of showing of emergency excerpt through conclusory statements.

            On June 27, 2022, both Defendants acknowledged receipt of the Complaint, summons, and the ex parte application.

            On July 6, 2022, Guzman filed an ex parte application for a TRO and OSC enjoining Defendants from impairing Guzman’s access to and use of the wells and the Oil Facilities.  Dept. 45 (Judge Recana) denied the application on July 8, 2022, ruling that it belonged in writs and receivers.

On July 12, 2022, the court granted an ex parte application for an order shortening time for hearing on a noticed motion for a preliminary injunction and ordered Guzman to file any supplemental brief by July 15, 2022.

            B. Applicable Law

            An injunction is a writ or order requiring a person to refrain from a particular act; it may be granted by the court in which the action is brought, or by a judge thereof; and when granted by a judge, it may be enforced as an order of the court.  CCP §525.  An injunction may be more completely defined as a writ or order commanding a person either to perform or to refrain from performing a particular act.  See Comfort v. Comfort, (1941) 17 Cal.2d 736, 741. McDowell v. Watson, (1997) 59 Cal.App.4th 1155, 1160.[2]  It is an equitable remedy available generally in the protection or to prevent the invasion of a legal right.  Meridian, Ltd. v. City and County of San Francisco, et al., (1939) 13 Cal.2d 424.

            The purpose of a preliminary injunction is to preserve the status quo pending final resolution upon a trial.  See Scaringe v. J.C.C. Enterprises, Inc., (1988) 205 Cal.App.3d 1536. Grothe v. Cortlandt Corp., (1992) 11 Cal.App.4th 1313, 1316; Major v. Miraverde Homeowners Assn., (1992) 7 Cal.App.4th 618, 623.  The status quo has been defined to mean the last actual peaceable, uncontested status which preceded the pending controversy.  Voorhies v. Greene (1983) 139 Cal.App.3d 989, 995, quoting United Railroads v. Superior Court, (1916) 172 Cal. 80, 87. 14859 Moorpark Homeowner’s Assn. v. VRT Corp., (1998) 63 Cal.App.4th 1396. 1402.

            A preliminary injunction is issued after hearing on a noticed motion.  The complaint normally must plead injunctive relief.  CCP §526(a)(1)-(2).[3]  Preliminary injunctive relief requires the use of competent evidence to create a sufficient factual showing on the grounds for relief.  See e.g. Ancora-Citronelle Corp. v. Green, (1974) 41 Cal.App.3d 146, 150.  Injunctive relief may be granted based on a verified complaint only if it contains sufficient evidentiary, not ultimate, facts.  See CCP §527(a).  For this reason, a pleading alone rarely suffices.  Weil & Brown, California Procedure Before Trial, 9:579, 9(ll)-21 (The Rutter Group 2007).  The burden of proof is on the plaintiff as moving party.  O’Connell v. Superior Court, (2006) 141 Cal.App.4th 1452, 1481.

            A plaintiff seeking injunctive relief must show the absence of an adequate damages remedy at law.  CCP §526(4); Thayer Plymouth Center, Inc. v. Chrysler Motors, (1967) 255 Cal.App.2d 300, 307; Department of Fish & Game v. Anderson-Cottonwood Irrigation Dist., (1992) 8 Cal.App.4th 1554, 1565.  The concept of “inadequacy of the legal remedy” or “inadequacy of damages” dates from the time of the early courts of chancery, the idea being that an injunction is an unusual or extraordinary equitable remedy which will not be granted if the remedy at law (usually damages) will adequately compensate the injured plaintiff.  Department of Fish & Game v. Anderson-Cottonwood Irrigation Dist., (1992) 8 Cal.App.4th 1554, 1565.

            In determining whether to issue a preliminary injunction, the trial court considers two factors: (1) the reasonable probability that the plaintiff will prevail on the merits at trial (CCP §526(a)(1)), and (2) a balancing of the “irreparable harm” that the plaintiff is likely to sustain if the injunction is denied as compared to the harm that the defendant is likely to suffer if the court grants a preliminary injunction.  CCP §526(a)(2); 14859 Moorpark Homeowner’s Assn. v. VRT Corp., (1998) 63 Cal.App.4th 1396. 1402; Pillsbury, Madison & Sutro v. Schectman, (1997) 55 Cal.App.4th 1279, 1283; Davenport v. Blue Cross of California, (1997) 52 Cal.App.4th 435, 446; Abrams v. St. Johns Hospital, (1994) 25 Cal.App.4th 628, 636.  Thus, a preliminary injunction may not issue without some showing of potential entitlement to such relief.  Doe v. Wilson, (1997) 57 Cal.App.4th 296, 304.  The decision to grant a preliminary injunction generally lies within the sound discretion of the trial court and will not be disturbed on appeal absent an abuse of discretion.  Thornton v. Carlson, (1992) 4 Cal.App.4th 1249, 1255.

            A preliminary injunction ordinarily cannot take effect unless and until the plaintiff provides an undertaking for damages which the enjoined defendant may sustain by reason of the injunction if the court finally decides that the plaintiff was not entitled to the injunction.  See CCP §529(a); City of South San Francisco v. Cypress Lawn Cemetery Assn., (1992) 11 Cal.App.4th 916, 920.

            C. Statement of Facts[4]

            1. Guzman’s Evidence[5]

a. The Leitch Lease

On March 29, 1938, Sutherland (then named Leitch), as Lessor, and Bering, as Lessee, entered into the Leitch Lease, pursuant to which Bering had the right to explore for and produce oil on the Property.  Guzman Decl., ¶8, Ex. C; RJN Ex. 1.  The Leitch Lease includes the Lessee’s right of entry onto the surface land and to erect, repair and replace all pipelines, telephone lines, tanks, machinery, buildings and other structures that the lessee desires to operate the business.  Guzman Decl., ¶8, Ex. C; RJN Ex. 1.  

            The Leitch Lease entitles Lessor Southerland to one-sixth of the proceeds from oil production less customary deductions.  Guzman Decl., ¶8, Ex. C; RJN Ex. 1.  The Lessor has the right to examine the land, the work, and records of the production from the land.  Guzman Decl., ¶8, Ex. C; RJN Ex. 1.  Section 22 provides that Lessee Bering shall pay royalties to the Lessor, but no change in the ownership of the land or minerals and no assignment of rents or royalties is binding on the Lessee until it receives satisfactory written evidence thereof.  Guzman Decl., ¶8, Ex. C; RJN Ex. 1.

            The Leitch Lease term is 20 years plus however long thereafter the land produces oil and minerals.  Guzman Decl., ¶8, Ex. C; RJN Ex. 1.  Per section 21, violation of any terms of the lease entitles Lessor Southerland to terminate the lease after 30 days’ notice, save as to the five acres surrounding any well producing oil as to which the Lessee is not in default and any right-of-way to and from it.  Guzman Decl., ¶8, Ex. C; RJN Ex. 1. 

Pursuant to the Leitch Lease, Bering drilled the Leitch Well in 1939.  Guzman Decl., ¶7; RJN Ex. 1; Guadiana Decl., ¶8, Ex. C. 

On March 6, 2017, Lessee Forster assigned her rights to Guzman via the Leitch Assignment.  Norton consented to this assignment as Lessor of the Leitch Lease.  Guzman Decl., ¶¶ 9-10, Ex. D-E; Guadiana Decl., ¶10, Ex. F.[6]

b. The Sutherland Lease

            On March 29, 1938, Sutherland, as Lessor, and Zephyr, as Lessee, entered into the Sutherland Lease pursuant to which Zephyr had the right to explore for and produce oil from the certain property.  Guzman Decl., ¶13, Ex. F; RJN Ex. 1.  Unlike the Leitch Lease, the Sutherland Lease did not grant the Lessee the right to use the surface, instead requiring that any installments be on the adjacent Property.  Guzman Decl., ¶13, Ex. F; RJN Ex. 1. 

Lessor Southerland is entitled to one-sixth of the proceeds from oil production less customary deductions.  Section 22 provides that Lessee Zephyr shall pay royalties to the Lessor, but no change in the ownership of the land or minerals and no assignment of rents or royalties is binding on the Lessee until it receives satisfactory written evidence thereof.  Guzman Decl., ¶13, Ex. F; RJN Ex. 1.  The Lessor had the right to examine land, the work, and records of the production from the land.  Guzman Decl., ¶13, Ex. F; RJN Ex. 1.  

            The Southerland Lease term is 20 years plus however long thereafter the land produces oil and minerals.  Guzman Decl., ¶8, Ex. C; RJN Ex. 1.  Per section 21, violation of any terms of the lease entitles Lessor Southerland to terminate the lease after 30 days’ notice, save as to the five acres surrounding any well producing oil as to which the Lessee is not in default and any right-of-way to and from it.  Guzman Decl., ¶8, Ex. C; RJN Ex. 1. 

            Because the Sutherland Lease requires the building of facilities on adjacent land, on September 15, 1953, the Monterey Oil Company and Sunland Oil Company granted Zephyr the Easement allowing it to drill the well and build Oil Facilities on the Property.  Guzman Decl., ¶14, Ex. G.  The Easement is in effect for however long the land produces oil and minerals.  Guzman Decl., ¶14, Ex. G.  The Easement will expire when Guzman stops drilling, deepening, plugging back or repairing a well that produces oil in paying quantities, unless the well resumes such production within four months.  Guzman Decl., ¶14, Ex. G. 

Pursuant to the Sutherland Lease and Easement, Zephyr first drilled the Sutherland Well on the Property in 1954.  Guzman Decl., ¶12; Guadiana Decl., ¶9, Ex. D.

            On March 6, 2017, Lessee Forster assigned her rights to Guzman via the Sutherland Assignment.  The Lessor of the Sutherland Lease consented to this assignment.  Guzman Decl., ¶¶ 15-16, Ex. H-I; Guadiana Decl., ¶10, Ex. F.

            Both wells have produced oil in paying quantities since Guzman’s acquisition, using the Property to access the Sutherland Well, and both leases and the Easement remain in effect.  Guzman Decl., ¶¶ 11, 17-18.  The California Geologic Energy Management Division (“CalGEM”) identifies Guzman as the operator for both wells.  Guadiana Decl., ¶10, Ex. E.

            c. The Dispute

            621 Two is the current owner of record for the Property, acquired by grant deed in in October 2014.  Guzman Decl., ¶¶ 5, 40, Ex. A.  Guzman and all predecessors in interest always have traversed the Property to access the wells and Oil Facilities.  Guzman Decl., ¶40. 

In February 2020, Guzman and 621 Two manager Starflinger agreed that Guzman would provide two business days’ notice when it needs a rig to serve the Sutherland Well, and five calendar days’ notice when a rig is needed on the Leitch Well.  Guzman Decl., ¶44, Ex. U.  Starflinger would then move trucks out of the way in a timely manner.  Guzman Decl., ¶44, Ex. U. 

            On January 29, 2021, Guzman received a letter from Defendant Future Growth’s predecessor, the Shepard Trust, that it had sold all interest in the leases to Future Growth and that Guzman must send all future royalty payments to the latter.  Guzman Decl. ¶20, Ex. J.  The letter included a quitclaim deed that transfers the leases to Future Growth.  Guzman Decl. ¶21, Ex. K.  The quitclaim deed is unclear and ambiguous in that it appears to convey only the royalty interest in the leases (1/6 of crude oil produced minus 1/6 of the property taxes).  Guzman Decl., ¶24.  The letter also included a Change in Ownership Statement showing that the Shepard Trust transferred all revenue and working interest to Future Growth in exchange for $91,000.  Guzman Decl. ¶¶ 22, 25, Ex. K.  The Change in Ownership Statement wrongly stated that 100% of the Revenue Interest and “Working Interest” had been transferred to Future Growth.  Guzman Decl., ¶25.  Yet, Guzman is the owner of 100% of the working interest and the owner of the majority of the revenue interest.  Guzman Decl., ¶25.

            On February 9, 2021, Guzman sent a letter to Future Growth requesting clarification.  Guzman Decl. ¶26, Ex. M.  Guzman observed that the Lessor’s interest for the past two years – one-sixth of the total revenue – was $3,870 in 2019 and $4,872 in 2020.  Guzman Decl. ¶26, Ex. M.  Guzman asked whether listing the transferred interest as 100% on the Change in Ownership Statement was an attempt to claim more than the one-sixth interest the Lessor receives under the leases.  Guzman Decl. ¶26, Ex. M.  Guzman’s counsel did not think this was the case but requested confirmation that Future Growth only claimed the one-sixth interest or an explanation if Future Growth claimed more.  Guzman Decl. ¶26, Ex. M.

            In a follow-up letter dated November 22, 2021, Guzman requested a completed W-9 and documentation from Future Growth.  Guzman Decl. ¶27, Ex. N.  Guzman believes this form is required by law, but it has not received it from Future Growth to date.  Guzman Decl. ¶28. 

Because Future Growth failed to address the uncertainties in title for the leases and failed to provide a W-9 form, Guzman began segregating and withholding royalties per section 22 of the leases.  Guzman Decl. ¶29.  This is also common practice in the industry.  Guzman Decl. ¶38.

            On December 20, 2021, Future Growth sent a Notice of Default demanding the royalty payments withheld since November 2020, a period in which Guzman produced over 1,000 barrels of oil from the wells.  Guzman Decl. ¶30, Ex. O.  Future Growth warned Guzman that if it failed to cure this default within 30 days as specified in paragraph 21 of the leases, Future Growth would exercise its right to terminate them.  Ex. O.

Future Growth sent a follow-up letter the next day requesting to inspect Guzman’s books for each well to determine the production of oil as permitted under the leases.  Guzman Decl. ¶31, Ex. P; Starflinger Decl., ¶6, Ex. C.  Because of its uncertainty as to Future Growth’s title to the Lessor’s interest and right to royalties, Guzman refused.  Guzman Decl. ¶32.

            Guzman instead sent an April 18, 2022 letter to Future Growth stating that Guzman would only release royalty payments after Future Growth (1) re-executed the quitclaim deed to reflect that it only had title to a 1/6 royalty on oil production; (2) rescinded the Change in Ownership Statement to reflect that Future Growth only acquired a partial interest in the royalties; (3) produced the W-9 as required by the IRS.  Guzman Decl. ¶33, Ex. Q; Starflinger Decl., ¶8, Ex. E.  Future Growth has not performed this tasks.  Guzman Decl. ¶34.

            The Sutherland Well ceased operating and on May 2, 2022 Guzman notified Starflinger that it was bringing a rig to explore below the surface to the well, determine why the well is idle, and address any safety issues that the idle well creates, including potential build-up of gas pressure.  Guzman Decl. ¶¶ 41-42.  Starflinger replied that he would not allow Guzman to access the Sutherland Well or the Oil Facilities.  Guzman Decl. ¶42.  When Guzman tried to access the Oil Facilities later that month, Starflinger had parked trucks in front of the access gate to prevent entry to either well.  Guzman Decl. ¶¶ 43-44, Ex. S. 

            On May 5, 2022, Future Growth sent Guzman a letter asserting that (1) Future Growth sent a letter on March 17, 2022 stating that Future Growth was exercising its right to terminate the leases for failure to comply with the demands in the December 20 and December 21, 2021 letters; (2) Guzman had continued to ignore this termination after over a month; (3) Future Growth has no reason to provide W-9 information after termination; and (4) Guzman must issue a quitclaim deed relinquishing its interests in the leases to Future Growth.  Guzman Decl. ¶35, Ex. R; Starflinger Decl., ¶9, Ex. F. 

Guzman never received the March 17, 2022 letter referred to in the March 5, 2022 letter.  Guzman Decl., ¶36. 

Guzman believes the leases are still in full effect.  Guzman is still producing oil from both wells and willing to release royalties and provide accounting once Future Growth provides the requested documents requested.  Guzman Decl. ¶¶ 36-37.

            On May 27, 2022, after hearing the ex parte application for a TRO, this court ordered Defendants to provide Guzman with access to the Property so that it can evaluate the wells but not withdraw oil from them.  Guadiana Decl., ¶2, Ex. A.  It also ordered the parties to meet and confer as to any secondary visit, such as to bring a rig.  Guadiana Decl., ¶2, Ex. A.

            On June 3, 2022, Guzman performed limited visual inspection of the wells per the court’s orders.  Guzman Decl. ¶45.  The inspection did not enable Guzman to identify and rectify the reason the Sutherland Well stopped operating, or to determine if it presented a safety hazard; it still needs to bring a rig.  Guzman Decl. ¶45. 

            On June 10, 2022, Guzman emailed Future Growth asking if it could bring a rig on June 17.   Guadiana Decl., ¶3, Ex. B.  Future Growth asked that Guzman identify any specific safety-related concerns and why it needed a rig, noting that the Sutherland Well has an above-pressure gauge and a valve for bleeding excess pressure.  Guadiana Decl., ¶3, Ex. B; Gore Decl., ¶7, Ex. A.  Guzman responded that it was not able to determine why the well went down and therefore does not know the severity of the safety issues posed without a rig.  Guadiana Decl., ¶¶ 4-5, Ex. B. 

            On June 17, 2022, Future Growth accused Guzman of bringing a rig to repair the Sutherland Well under the guise of non-existent safety concerns.  Guadiana Decl., ¶6, Ex. B.  It asserted that the court’s order for a second level of access was intended to repair any serious safety concerns identified during the first visit and Guzman never identified any.  Guadiana Decl., ¶6, Ex. B; Gore Decl., ¶9, Ex. B.  There was no risk of explosions or spills so long as the well remained inactive, and it would remain inactive until repaired.  Guadiana Decl., ¶6, Ex. B; Gore Decl., ¶9, Ex. B.  Future Growth therefore refused to provide entry for a rig.  Guadiana Decl., ¶6, Ex. B; Gore Decl., ¶10, Ex. B. 

            As long as 621 Two prevents entry, Guzman cannot conduct mandatory routine maintenance or regular inspections, exposing it to criminal liability.  Guzman Decl., ¶¶ 48-52.  Guzman holds $20,000 in indemnity bonds – $10,000 per well – securing the City of Los Angeles for any costs or expenses incurred in altering, reconstructing, or repairing the wells.  Guzman Decl., ¶¶ 53-54, Ex. T.  Guzman also cannot bring the rig needed to repair the Sutherland Well to prevent pressure buildup and a blowout, and Guzman suspects certain rods have failed.  Guzman Decl., ¶55.  According to Thomas Walker (“Walker”) Walker Decl., ¶4, Ex. A), leaving the Sutherland Well inoperative for too long will result in plugging that will reduce productivity until a $100,000 acid cleanout.  Walker Decl., ¶5, Ex. B.

            The Leitch Well still produces oil into a storage tank onto the Property, which has a maximum capacity of 500 barrels.  As of July 14, 2022, this tank is half full.  Guzman Decl., ¶¶ 56-57.  Unless Guzman can bring a tanker onto the Property to remove oil from the tank, it will spill over in 5.5 months.  Guzman Decl., ¶58.  Guzman also cannot sell oil from either well during a peak season.  Guzman Decl., ¶¶ 58-59.  At an estimated price of $120 per barrel and estimated production of 120 barrels per well per month, monthly losses for leaving the Sutherland Well unrepaired are approximately $12,000.  Guzman Decl., ¶60.

            The royalties owed on the leases since November 2020 total $24,411.30.  Fancher Decl., ¶¶ 2-3, Ex. A-B.  Guzman has $46,157.63 in its bank account even after 31 withdrawals in June 2022 and it can pay outstanding royalties when it chooses.  Fancher Decl., ¶4, Ex. C.

            2. Defendants’ Evidence[7]

            The Property is an industrial site of over five acres with office, retail, and industrial space as well as parking spaces leased for long-term storage of 18-wheeler trucks.  Gore Decl., ¶11.  The wells are at the center of the Property.  Gore Decl., ¶11.  The presence of a well on the Property poses a hardship to the surface rights owner of the Property and its various lessees.  Gore Decl., ¶13.

            A company’s W-9 shows its Tax Identification Number (“TIN”).  RJN Ex. 3.  If the company owes royalties or interest to a payee and the latter has not furnished its TIN, the payor can withhold up to 24% of the amount owed.  RJN Ex. 3, pp. 18-19.

            In an earlier case against 621 Two, Guzman applied for a TRO and a preliminary injunction on November 1, 2017 to enjoin 621 Two and Starslinger against denying access to the Property.  RJN Ex. 2.  On November 2, 2017, the court denied the motion.  RJN Ex. 2.

            The Change in Ownership Statement attached to Shepherd’s January 29, 2021 letter to Guzman informed the County Assessor that the Shepard Trust transferred 100% of her interest to Future Growth, not that she was transferring anyone else’s interest.  Starflinger Decl., ¶3, Ex. A.  The only question Guzman raised in its counsel’s February 9, 2021 letter to Future Growth’s counsel (Guzman Decl. ¶26, Ex. M) was an inquiry Future Growth was claiming a 100% interest in the oil revenue.  Starflinger Decl., ¶4.  No issue was raised about the quitclaim deed or a W-9.  Starflinger Decl., ¶4.  Future Growth’s then attorney, Robert Schacter, Esq., explained to Guzman’s counsel that Future Growth was claiming only 100% of Shepherd’s interest in the oil revenue.  Id.  After this conversation between lawyers, Starflinger did not hear Guzman raise this issue again until after Future Growth terminated the leases in March 2022.  Starflinger Decl., ¶4. 

            Future Growth’s December 20, 2021 letter to Guzman served as a notice of default which, per the leases, gave Guzman 30 days to cure the default by paying the royalties it had withheld.  Starflinger Decl., ¶5, Ex. B.  Future Growth never received a response to the notice of default or the December 2021 request for inspection of oil production records.  Starflinger Decl., ¶¶ 5-6, Exs. B-C.

            On March 17, 2022, Future Growth sent Guzman a Notice of Termination for its failure to cure the Notice of Default and comply with the request for inspection.  Starflinger Decl., ¶7, Ex. D.  Guzman’s April 18, 2022 response (Guzman Decl. ¶33, Ex. Q; Starflinger Decl., ¶8, Ex. E) was the first time Guzman asked about the W-9.  Starflinger Decl., ¶8, Ex. E.  Although the response refers to a November 21, 2021 letter seeking a W-9, Future Growth never received it, and it would have been untimely anyway.  Starflinger Decl., ¶8.

            On May 5, 2022, Future Growth sent a letter in response to Guzman’s April 18, 2022 letter asking that it restate the quitclaim deed by asking that Guzman provide a quitclaim deed rouncing any title to the leases.  Starflinger Decl., ¶9, Ex. F.  To date, Guzman has not paid any of the royalties owed.  Starflinger Decl., ¶10.

            On Thursday, June 2, 2022, Future Growth’s counsel emailed Guzman’s counsel suggesting that it conduct the court-ordered inspection that day or next.  Gore Decl., ¶4.  Because Future Growth did not hear from Guzman, Future Growth’s counsel asked Guzman’s counsel on June 6, 2022 if it had already performed the initial inspection.  Gore Decl., ¶5.  Guzman’s counsel responded that it had done so and found no imminent threat of the wells overflowing.  Gore Decl., ¶6. 

            Future Growth’s requests for accounting of all royalty payments and for financial records of the segregated account for withheld royalties have failed.  Gore Decl., ¶14, Ex. C.

            D. Analysis

            Plaintiff Guzman moves for a preliminary injunction enjoining Defendants from impeding Guzman’s access to the Lietch and Sutherland Wells on the Property.

            1. Probability of Success

            Guzman has claims for private nuisance per se, quiet title, and intentional interference with economic advantage. 

            A nuisance per se exists when a legislative body “expressly declares a particular object or substance, activity, or circumstance, to be a nuisance.” City of Claremont v. Kruse (2009) 177 Cal.App.4th 1153, 1163; accord City of Costa Mesa v. Soffer (1992) 11 Cal.App.4th 378, 382 (“The legislature has the power to declare certain uses of property a nuisance and such use thereupon becomes a nuisance per se…Nuisances per se are so regarded because no proof is required, beyond the actual fact of their existence, to establish the nuisance.”) (internal quotations omitted); Sullivan v. City of Los Angeles, (1953) 116 Cal.App.2d 807, 810 (a city’s general police power enables it to “make and enforce ordinances to regulate or prohibit a thing or act which is of such a nature that it may become a nuisance or may be injurious to the public health if not suppressed or regulated.”) 

            Operators of oil production facilities shall maintain production facilities in good condition and in a manner to prevent leakage or corrosion and to safeguard life, health, property, and natural resources.  14 CCR §1777(a).  Vehicle access routes to all production facilities must be maintained in a safe and passable condition.  14 CCR §1777(f).

            Guzman presents evidence that 621 Two has blocked access to the wells and Oil Facilities by parking trucks in front of the gate.  Guzman Decl. ¶¶ 43-44, Ex. S.  Guzman argues that blocking vehicular access to oil production facilities constitutes a nuisance per se because 14 CCR section 1777 requires that vehicle access be permitted and any action that blocks free passage to property is a nuisance under Civil Code section 3479.   Mot. at 17.    

            The language of 14 CCR section 1777 suggests that it is applicable only to operators.  14 CCR §1777(a).  As Guzman states, CalGEM recognizes it as the operator of the well.  Guadiana Decl., ¶10, Ex. E.  Nonetheless, Guzman will prevail on its nuisance claim if Defendants are blocking free passage to Guzman’s property.

            This raises the issue whether Guzman has any property rights under the leases.  In opposition, Defendants assert that Guzman has no right to access the Property and therefore cannot succeed on a nuisance action.  Opp. at 14. 

            Guzman argues that 621 Two only owns the surface estate of the Property.  An owner of a surface estate subservient to mineral rights cannot prevent the mineral rights owner from accessing the mineral underneath the estate.  Callahan v. Martin, (1935) 3 Cal.2d 110, 122, 127 (landowner’s grant of oil rights implied right of entry).  As a result, 621 Two lacks standing to challenge Guzman’s rights as lessee of the Wells.  Mot. at 18-19.  As lessor of the mineral rights, Future Growth may not block access to the Property because it has no rights to the surface estate.  Howard v. County of Amador, (1990) 220 Cal.App.3d 962, 972 (evaluating whether assignment of mineral rights is a change in ownership of either the mineral estate or the surface estate for property tax purposes).  Therefore, neither 621 Two nor Future Growth has the right to block Guzman’s access to the Property.  Mot. at 19.

            Defendants describe this argument as a Catch-22, but argue that it is irrelevant because Guzman has no leasehold rights and cannot enter the Property except to perform the limited purpose of plugging and abandoning the Wells as required by the lease-end provisions of the leases and the Public Resources Code.  Opp. at 14-15.

The issue is whether the leases have been terminated.  Defendants assert that Future Growth terminated the leases in a Notice of Termination issue on March 17, 2022 as a result of Guzman’s failure to pay royalties and permit inspection of records.  Starflinger Decl., ¶¶ 7, 10, Ex. D.  Guzman asserts that it never received this letter.  Guzman Decl., ¶36.  It is not entirely clear that this is true because Guzman’s April 18, 2022 letter states: “We are in receipt of your letters....”  (Starflinger Decl., Ex. E), and the March 17 Notice of Termination, the December 20, 2021 Notice of Default, and the December 21, 2021 demand to inspection production records were the only letters Future Growth sent during this period.  Starflinger Decl., Exs. B, C, D.  Nonetheless, the March 17 termination letter is both undated and unsigned.  As a result, the court cannot conclude that it was ever delivered.  See Evid. Code §641.  Thus, Guzman’s first notice of the lease termination was Future Growth’s May 5, 2022 letter.  Starflinger Decl., Ex. F. 

Guzman asserts that Future Growth has no right to terminate the leases because it (Guzman) was not in default.  Guzman has the right to withhold royalties and prohibit access to its oil production records because the leases provide that “no assignment of rents or royalties shall be binding on the Lessee until it has been furnished with satisfactory written evidence thereof.”  Guzman Decl., ¶¶ 37-39, Exs. C, F, §22.  As a result of this provision, Guzman is entitled to accurate written evidence of an assignment before it is obligated to turn over royalties.  Mot. at 20.

This evidence has not been provided.  Guzman requested an updated quitclaim deed and Change in Ownership Statement that Future Growth never provided.  Guzman Decl. ¶26, Ex. M; RJN Ex. 1.  Future Growth also never provided the W-9 required by law before Guzman could release the royalties.  Guzman Decl. ¶27, Ex. N.  The leases are therefore still in effect and Guzman is willing to release royalties and provide an accounting once Future Growth provides the requested documents.  Guzman Decl., ¶37.  Mot. at 20.

            Guzman is wrong.  In the deed attached to her assignment, Shepherd quitclaimed the leases to Future Growth.  Guzman Ex. J.  As Defendants argue, Shepherd could not convey what she did not own.  Opp. at 12.  This point was made clear in the conversation between counsel after Guzman’s February 9, 2021 letter to Future Growth’s counsel.  Guzman Ex. J; Starflinger Decl., ¶4.  Shepherd did not convey more than the 1/6 royalty interest in the leases that she held, and Guzman knew this in February 2021.

The Change in Ownership form is a statement alerting the County Assessor that a re-assessment of property may be required.  It has no bearing on the rights between the parties. 

The W-9 is a form conveying a TIN.  The IRS allows a party owing royalties to withhold 24% of the amount if the payee fails to provide a TIN through the W-9.  RJN Ex. 3.  This form does not justify Guzman’s failure to pay all royalties to Future Growth. 

As Future Growth notes (Opp. at 12-13), Guzman’s counsel’s February 9, 2021 letter did not even mention the Change in Ownership form or the need for a W-9.  These matters were raised by Guzman only on April 18, 2022, long after Future Growth’s December 20, 2021 Notice of Default, December 21, 2021 demand for inspection, and March 18, 2022 Notice of Termination.  Starflinger Decl., Ex. E.[8] 

Guzman’s after-the-fact reliance on the Change in Ownership form and lack of a W-9 therefore seem to be makeweight issues.  Neither has any bearing on Guzman’s contractual right to satisfactory written evidence of Shepherd’s assignment to Future Growth.  Guzman Exs. C, F, §22. 

            Thus, Guzman had satisfactory evidence of the assignment from Shepherd as clarified in Guzman’s counsel’s February 2021 communication with Future Growth’s counsel.  Whatever the custom and practice, Guzman had no right to withhold royalties from Future Growth, which had the right to send the Notice of Default on December 20, 2021 and to terminate the leases on May 5, 2022, well after the thirty-day period to cure the default.  Starflinger Decl., ¶8, Ex. E; Guzman Decl. ¶35, Ex. R. 

            Guzman argues that its default is excused by Future Growth’s refusal to resolve the uncertainty in its title and that it at least held an honest belief in that uncertainty which precludes forfeiture of the leases.  See El Rio Oils, Canada, Ltd. v. Chase, (1949) 95 Cal.App.2d 402, 410 (good faith denial of indebtedness may relieve lessee from forfeiture).  Future Growth did not refuse to resolve the uncertainty.  Guzman fails to provide sufficient evidence of its good faith action that would justify avoiding forfeiture and its makeweight reliance on issues not related to title suggest otherwise.  Guzman may provide more such evidence at trial, but for purposes of this motion Guzman has not shown a probability of success on its nuisance per se claim.[9]

            2. Balance of Hardships

            In determining whether to issue a preliminary injunction, the second factor which a trial court examines is the interim harm that plaintiff is likely to sustain if the injunction is denied as compared to the harm that the defendant is likely to suffer if the court grants a preliminary injunction.  Donahue Schriber Realty Group, Inc. v. Nu Creation Outreach, (2014) 232 Cal.App.4th 1171, 1177.  This factor involves consideration of the inadequacy of other remedies, the degree of irreparable harm, and the necessity of preserving the status quo.  Id.

            Guzman claims that its inability to conduct mandatory routine maintenance or regular inspections exposes it to criminal liability.  Guzman Decl., ¶¶ 48-52.  Additionally, because the Sutherland Well has blown out, Guzman will incur $100,000 in repairs if it leaves the well inoperative for too long.  Walker Decl., ¶5, Ex. B.  Meanwhile, the failure to operate the Sutherland Well means lost revenue of about $12,000 per month.  Guzman Decl., ¶60.  Finally, if Guzman cannot bring a tanker onto the Property to remove oil from the tank for the Leitch Well, it will spill in 5.5 months.  Guzman Decl., ¶58.

            Defendants assert that because Guzman no longer owns the wells after termination of the leases, and Guzman will not suffer most of the alleged harm.  Opp. at 16-17.  For example, the Lease requires that Guzman plugs and abandons the wells upon lease termination; that will end any risk of an oil spill.  Opp. at 17.  Additionally, the Sutherland Well has an above-pressure gauge and a valve for bleeding excess pressure. Guadiana Decl., ¶3, Ex. B; Gore Decl., ¶7, Ex. A.  The appropriate remedy for any damages to the Sutherland Well and repair costs is increased damages.  Opp. at 17. 

Termination of the leases ends all obligations in a contract that are still executory.  See 1 Witkin, Summary of California Law (Contracts), (2017 11^th ed.) §955, p. 1007-08.  This ends all of Guzman’s rights and obligations, potentially including its contractual obligations for plugging and abandoning the Wells at the “expiration or sooner termination” of the leases.  Guzman Ex. F, §26.  That obligation may belong to Future Growth now.  The court need not decide this issue because Future Growth would welcome Guzman’s access for the purpose of plugging and abandoning the Wells.  Opp. at 16-17.

As to their own harm, Defendants assert that the wells are a nuisance interfering with other uses of the Property.  Gore Decl., ¶¶ 12-13.  As Guzman notes, the Wells were drilled decades ago, and Defendants can hardly call them nuisances now.  Reply at 8; Guadiana Decl., ¶¶ 8-9, Ex. C-D. 

             The balance of harm favors denial of a preliminary injunction because Guzman has no rights under the leases and there is no need for a preliminary injunction for it to plug and abandon the Wells.

            E. Conclusion

            The motion is denied.