Aronow v. Bishop

86 P.2d 644 | Mont. | 1938

The royalty assignments from Gordon Campbell to Nina E. Bishop, Helen M. Campbell and C.A. Springmyer, do not purport to affect the production of oil or gas under the leases issued to plaintiff Aronow. From the provisions of sections 221 and 223, Title 30, U.S.C.A., it is apparent that the rights conferred upon an oil and gas permittee are of a limited duration "not exceeding two years." It is also apparent that a permittee's right to obtain a lease does not accrue except upon condition that he has discovered oil or gas in commercial quantities, and when the condition is met, the right to apply for a lease is purely optional with the permittee. He is under no obligation to apply for a lease, and if a lease is applied for and obtained, it is for an entirely different term than that covered by the permit, and creates an entirely new estate or interest in the land. Neither of the oil and gas leases was in existence at the time of the Campbell royalty assignments. Campbell had at no time any "right, title or interest" to any of the oil produced under the oil and gas leases. The assignment itself specially refers to "said royalty under that certain Permit to Prospect for Oil and Gas." The situation is analogous to the ordinary case of an assignment of overriding royalty under an oil and gas lease. Such an assignment expires with the lease, and it cannot be seriously argued that the assignee's rights would continue under a subsequent lease covering the same premises. (Goocey v.Hopkins, 206 Ky. 176, 266 S.W. 1087.)

An oil and gas royalty ordinarily is effective only during the life of the lease existing at the time of its creation. (Bellport v. Harrison, 123 Kan. 310, 255 P. 52.) The interest acquired by these defendants was, in effect, an overriding royalty interest under the existing permit, and expired with the permit. The situation is no different than would have arisen had Campbell been the owner of an ordinary oil and gas lease and made assignments of overriding royalty. (See, also,Hawkins v. Klein, 124 Okla. 161, 255 P. 570, 571; Robinson v. Eagle-Picher Lead Co., 132 Kan. 860, 297 P. 697, 75 A.L.R. 840; Gordon v. Empire Gas Fuel Co., 63 F.2d 487.)

The foregoing authorities sustain the contention of the appellant herein that assignments of royalty made by the original permittee, Gordon Campbell, while he was the owner of the oil and gas prospecting permit, cannot now be imposed upon the oil and gas lease which appellant has obtained direct from the Government after expiration of the term for which the oil and gas prospecting permit was issued. The royalties assigned under the prospecting permit expired when the oil and gas prospecting permit expired, in the absence of some covenant whereby the party who subsequently acquired the oil and gas lease from the Government agreed to continue such royalties in force and effect during the term of the lease. No such agreement was ever made by the appellant.

It should be noted that neither by the terms of the prospecting permit, nor the regulations, nor the statute, is there any obligation on the part of the permittee to apply for an oil and gas lease or to assume the obligations of such lease. The permittee does not covenant that he will seek a lease upon discovery of oil or gas, nor that he will comply with or perform the terms of an oil and gas lease. So far as the oil and gas lease is concerned, the permittee's right to apply for same is purely optional with permittee, provided he has complied with the terms of the permit as to development and discovery, etc.

Since the rights of the permittee to obtain an oil and gas lease after discovery of oil or gas upon the permit, are entirely optional with the permittee, the permittee's interest in the oil and gas lease which might thereafter be issued, is only that of an optionee. The law relative to options becomes applicable to this case. It is the settled law of this state, and of the authorities generally, that an option to purchase or acquire an interest in land, does not vest in the optionee any title or estate whatsoever in the land. (O'Neill v. Wall, 103 Mont. 388,62 P.2d 672; Kramer v. Schmidt, 62 Mont. 568,206 P. 620; Bras v. Sheffield, 49 Kan. 702, 31 P. 306, 33 Am. St. Rep. 386; Powell v. Eckler, 96 Mich. 538, 56 N.W. 1;Young v. Matthew Turner Co., 168 Cal. 671, 143 P. 1029; 66 C.J. 486, 487; James on Options, secs. 501, 502.) Since Gordon Campbell was not vested with any title to the oil and gas leasehold, he could not, by any form of assignment, transfer to his assignee the title to the leasehold or any interest therein.

If the royalty assignments can be deemed to affect the oil or gas produced under plaintiff's leases, they are invalid, because not approved by the Secretary of the Interior, nor consented to by the lessee. Neither the permit nor any interest therein under departmental regulations is assignable without the written consent of the Department of the Interior. The record does not disclose that any of the assignments here involved have been approved by the Department. "Where a party holds a lease of Indian lands approved by the Interior Department containing a provision that the lessee will not, at any time during the lease, sub-lease or assign the same, or any interest therein, without the consent of the party of the first part and the approval of the Secretary of the Interior, a sublease without such consent is void and confers no rights." (31 C.J. 522, note 97A;Wattenbarger v. Hall, 26 Okla. 815, 110 P. 911; Reeves Co. v. Sheets, 16 Okla. 342, 82 P. 487; Megreedy v.Macklin, 12 Okla. 666, 73 P. 293.) Neither the case ofHerigstad v. Hardrock Oil Company, 101 Mont. 22,52 P.2d 171, nor that of Isaacs v. De Hon, (C.C.A.) 11 F.2d 943, has any bearing upon the matter of approval by the Secretary of the Interior. Among other things, the expression in the Herigstad Case is obiterdictum, and the Isaacs Case is based upon fraud consisting of a breach of trust by an agent or co-partners. There is no such issue presented here. This is an action to quiet title to two oil and gas leases issued by the United States to plaintiff. On appropriate pleadings, the sufficiency of which is not questioned, the case was tried to the court without a jury. The court found that on December 15, 1921, the Secretary of the Interior issued and delivered to Gordon Campbell an oil and gas prospecting permit covering certain described lands in Toole county; that oil in commercial quantities was discovered in October, 1924, on parts of this land, during the time the permit was in full force and effect, and sufficient in quantity to entitle Campbell and his successors in interest to the issuance of leases; that while Campbell was the holder of the permit and on December 24, 1923, he transferred and sold to Nina E. Bishop one per cent. royalty on all of the oil and gas produced and saved from most of the lands embraced in the permit. The assignment was recorded on February 1, 1924. The court further found that thereafter, and on November 30, 1937, Nina E. Bishop transferred and sold one-fourth of one per cent. royalty to Leo Bartl; one-fourth of one per cent. to S.J. Doyle and one-fourth of one per cent. to J.H. Usher on January 11, 1928, and one-eighth of one per cent. to J.H. Hasterlik on August 24, 1928; that all the transfers were duly recorded, Bartl's being recorded December 1, 1927, Doyle's June 4, 1928, Usher's July 30, 1928, and Hasterlik's December 15, 1930; that Gordon Campbell, while the holder of the permit, transferred and sold two per cent. of the royalty in the same lands to Helen M. Campbell on January 2, 1924, the instrument being recorded on January 17, 1925; that Gordon Campbell, while he was the holder of the permit, transferred and sold one per cent. of the royalty in the same lands to C.A. Springmyer on December 24, 1923, the instrument being recorded on August 29, 1927; that Springmyer is deceased and that at the time of his death he left surviving him his wife, Faye Springmyer, and two sons; that some time before September 14, 1928, the exact date not appearing, Gordon Campbell transferred and assigned the permit and plaintiff became the owner and holder thereof; that thereafter plaintiff, pursuant to the permit and after the permittee had complied with the terms thereof, obtained leases on the property covered by the permit — one dated February 27, 1925, and the other March 1, 1934, — both of which were recorded on January 21, 1936. The court found that plaintiff became the owner of the permit and of the leases with knowledge of the assignments of royalty in the oil and gas as above recited.

As conclusions of law the court found that the assignments operated to convey the interest described in each, and that the interest was one in the oil and gas in and under the lands described in each assignment; that the assignment of the permit to plaintiff was subject to the interests of the grantees in the royalty assignments; that the issuance of the leases did not terminate the royalty interests, and that plaintiff was entitled to have her title quieted but subject to the royalty interests covered by the assignments. Plaintiff appealed from the judgment and makes several specifications of error.

The main contentions of plaintiff are that the assignments by[1] their terms relate merely to the oil and gas under the permit, and that the assignments do not purport to affect the production of oil and gas under the leases; and that Gordon Campbell, never having owned the leases, could not impose burdens upon them by the royalty assignments.

The assignments of the royalty by Gordon Campbell are identical in form. What we have to say, therefore, as to one of them applies equally to the others. The assignment by Gordon Campbell to Helen M. Campbell reads:

"That Gordon Campbell of Great Falls, Montana, for and in consideration of the sum of One Dollar, and other good and valuable considerations in hand paid by Helen M. Campbell of Seattle, Wash., hereinafter called assignee, the receipt of which is hereby acknowledged and confessed, does hereby sell, assign, transfer, convey and set over unto the said assignee all of his right, title and interest in and to two per cent. (2%) of all of the oil and all of the gas produced and saved from the hereinafter described lands located in the County of Toole, State of Montana, to-wit": [Here follows description of property.] Continuing it states: "To have and to hold unto the said assignee, his heirs, administrators and assigns said royalty as above set forth, the said oil and gas so produced and saved from said lands to be delivered free of cost to the royalty owner in the pipe line serving said premises or tanks erected for the purpose of storing such products, together with the rights, privileges and benefits to be derived therefrom, and I do hereby assign said royalty under that certain Permit to Prospect for Oil and Gas dated December 15, 1921, issued by the United States Government to Gordon Campbell, Great Falls Serial No. 051863, covering the above described lands; and I agree to warrant and defend the title to the same and that I have lawful authority to sell and assign said royalty."

It is evident from the assignment as a whole that the statement in the assignment reading "and I do hereby assign said royalty under that certain Permit to Prospect for Oil and Gas dated December 15, 1921, issued by the United States Government to Gordon Campbell," was not intended in anywise to limit the assignment, but was merely explanatory of the interest of Gordon Campbell entitling him to make the royalty assignment.

To hold that the assignments only covered oil and gas produced under the permit and before leases were issued, would be to say that the assignments were practically useless. Under the federal statutes a permittee will not produce oil or gas to any great extent under a permit. Upon discovering valuable deposits of oil or gas he will immediately apply for a lease. Under the lease he is only required to pay to the government a royalty of five per cent. on one-fourth of the lands covered by the permit, and not less than twelve and one-half per cent. on the remainder if he exercises his preferential right to a lease on the whole tract embraced in the permit. (Sec. 223, Title 30, U.S.C.A.) Whereas, under the permit, he will be obliged to pay to the government twenty per cent. of the oil and gas produced. (Sec. 224, Id.)

While the assignments do not specifically refer to production under leases to be issued, after discovery under the permit, as was done in the assignments involved in the cases of Dougherty v. California Kettleman Oil Royalties, Inc., 9 Cal. 2d 58,69 P.2d 155, and United States v. Spalding,97 F.2d 701, we think a reasonable construction of the assignments, when read in conjunction with the federal statutes regulating the issuance of permits and leases, leads to the conclusion that the parties intended by the assignments to cover oil and gas produced from leases based upon discovery under the permit, as well as that produced under the permit.

Plaintiff contends that the permit expired or passed out of[2, 3] existence at the time of the issuance of the leases, and that upon executing the leases there was created a new estate or interest separate and apart from the prospecting permit, and hence that the assignment made by Gordon Campbell expired at the time the leases were issued. Consideration of this question calls for an investigation of the federal statutes relating to oil and gas permits and leases.

Under section 221, Title 30, U.S.C.A., a prospecting permit is issued "for a period not exceeding two years," with the right of extension for another two-year period. Other liberal provisions have been enacted from time to time authorizing an extension of the permits. (Sec. 222, Title 30, U.S.C.A., and secs. 222a, 222b, 222c, 222d 222e, 222f, 222g, 222h and 222i, Cumulative Annual Pocket Part of Titles 29-30, pp. 103-105.) "Under the Act and the authorities, the government `prospecting permit' would seem to be practically equivalent to the ordinary lease of privately owned land thought to contain oil and gas; the government merely adopts a different method of handling the matter. The private owner executes a so-called `lease' in the first instance, which authorizes the lessee to hold exclusive possession of the land for the purpose of prospecting for oil and gas, and it is generally held that such a `lease' does not vest in the lessee an estate in the land or in the oil and gas therein, but simply the right to prospect for oil and gas, `a sort of subterranean feraenaturae,' to which no title vests until reduced to possession by extraction from the earth; an incorporeal hereditament. (In reIndian Territory Illuminating Oil Co., 43 Okla. 307,142 P. 997; National Oil Pipe Line Co. v. Teel, 95 Tex. 586, 587,68 S.W. 979; Richlands Oil Co. v. Morriss, 108 Va. 288,61 S.E. 762; Crawford v. Ritchey, 43 W. Va. 252, 27 S.E. 220;Venture Oil Co. v. Fretts, 152 Pa. 451, 25 A. 732; EasternOhio Oil Co. v. McEvoy, 75 Kan. 515, 89 P. 1048; Barnsdall v. Owen, 200 Fed. 519, 118 C.C.A. 623.) This is exactly the situation of the holder of a government `permit.' `The permit is itself an act of the Land Department, final so long as it lasts, and though in its inception a mere license conveying no estate in the land, it is a final grant of a valuable right pursuant to law which ought to be secured to the person to whom the law gives it.' (Witbeck v. Hardeman, (C.C.A.) 51 F.2d 450, 452, affirmed 286 U.S. 444, 52 Sup. Ct. 604, 76 L. Ed. 1217.) This `grant of a valuable right' does not differ from the grant contained in the ordinary oil and gas lease executed by the individual owner, and, whatever the rule may be in other states, in this jurisdiction such a right is held to take `the character of an interest or an estate in the land itself. It is an interest in the land, although incorporeal.' (Marias River Syndicate v.Big West Oil Co., 98 Mont. 254, 38 P.2d 599, 601), and is sufficiently an `interest in real estate' to support an attachment. (Williard v. Federal Surety Co., 91 Mont. 465,8 P.2d 633.)" (Herigstad v. Hardrock Oil Co., 101 Mont. 22,52 P.2d 171.)

The permit is not extinguished by the granting of leases. It is the foundation for leases and, when granted to the permittee or his assignee, they merely constitute, in substance and effect, a continuation of rights granted by the permit but under different terms and conditions. (Sec. 223, Title 30, U.S.C.A.)

Concededly, plaintiff's leases are based upon and grow out of the prospecting permit issued to Gordon Campbell and which was transferred and conveyed to plaintiff. Gordon Campbell, while the owner and holder of the prospecting permit, had a sufficient interest in the property to make valid assignments of royalty interests, and such assignments of royalty covered oil and gas recovered under the permit, as well as oil and gas produced under leases based and issued upon the strength of discovery made under the permit.

Plaintiff relies upon the cases of Goocey v. Hopkins,206 Ky. 176, 266 S.W. 1087; Bellport v. Harrison, 123 Kan. 310,255 P. 52; Williard v. Campbell, 91 Mont. 493,11 P.2d 782; Hawkins v. Klein, 124 Okla. 161, 255 P. 570; Robinson v. Eagle-Picher Lead Co., 132 Kan. 860, 297 P. 697, 75 A.L.R. 840, and other cases holding, in effect, that royalties given under one lease do not affect subsequent leases; but these cases have to do with royalties given under one lease which expired before the issuance of another. Here the permit was in effect when the lease of February 27, 1925, was issued, and the right to the lease executed on March 1, 1934, sprang from the permit and the discovery thereunder. The fact that the permittee, or his[4] assigns, merely had the option to take a lease does not alter the result where, as here, the option was exercised. It is true we said in O'Neill v. Wall, 103 Mont. 388, 62 P.2d 672, that one holding an option to purchase land acquires but a privilege to buy which does not ripen into an interest in land until the privilege is exercised. There is, however, in some respects, a clear distinction between an option and a permit. An oil and gas permit carries many of the features of an ordinary option to buy or lease land, but has other features in addition: A mere option to purchase or lease grants the holder no right of possession, while the oil and gas permit carries the right of possession for purposes of exploration with the accompanying right to repel trespass, and the right to dispose of or sell any oil or gas produced while operating under the permit.

The next contention of plaintiff is that the court erred in finding that plaintiff became the owner of the oil and gas permit with knowledge of the assignments of royalty. As before stated, it does not definitely appear when plaintiff became the owner of the oil and gas permit. It does appear that the assignment to Nina E. Bishop was recorded on February 1, 1924. The assignment to Helen M. Campbell was recorded January 17, 1925, and the assignment to Springmyer was recorded August 29, 1927. The record does not disclose whether the assignment of the permit by Gordon Campbell was ever recorded. The only recorded instruments showing any right of plaintiff to the lands in question are the leases. One lease was issued to plaintiff on February 27, 1925, before the assignment of royalty to Springmyer was recorded, but the lease was not recorded until January 21, 1936. The other lease was issued November 1, 1934, and recorded January 21, 1936. The assignments of royalty were recorded prior to the time the leases were recorded, and therefore the leases were taken subject to the assignments under our recording statutes. (Sec. 6935, Rev. Codes;Hastings v. Wise, 91 Mont. 430, 8 P.2d 636.)

So far as the record discloses, plaintiff had nothing of record showing any interest in the lands until in 1936, or long after all the assignments of royalty were recorded. Hence it is immaterial, under the facts here, as to when plaintiff acquired actual notice of the assignments.

The burden of proof was upon plaintiff. In an action to quiet[5] title plaintiff must succeed on the strength of his own title and not on the weakness of that of his adversary. (Borgeson v. Tubb, 54 Mont. 557, 172 P. 326.) This should be particularly true where, as here, plaintiff did not assert in her reply to the answers that she was an innocent purchaser of the permit without notice, so as to raise that issue by the pleadings. (Reeder v. Cox, 218 Ala. 182, 118 So. 338.) If the court's finding of fact to the effect that plaintiff took the permit with notice of the assignments be eliminated from the findings, the result announced by the court in its conclusions of law would not be changed.

The next contention of plaintiff is that the assignments are[6] not valid because not approved by the Secretary of the Interior as required by rules promulgated by that department. These rules were promulgated for the benefit of the Department of the Interior, and the plaintiff here cannot take advantage of that regulation to defeat the assignments. (Herigstad v.Hardrock Oil Co., supra; Isaacs v. De Hon,11 F.2d 943.) The lack of approval by the Secretary of the Interior can only be raised by the government. (Dougherty v. CaliforniaKettleman Oil Royalties, Inc., supra.)

The judgment is accordingly affirmed.

MR. CHIEF JUSTICE GODDARD and ASSOCIATE JUSTICES STEWART, ANDERSON and MORRIS concur.

Rehearing denied January 30, 1939.