Joseph Guffey v. James Smith

Citation59 L.Ed. 856,35 S.Ct. 526,237 U.S. 101
Decision Date05 April 1915
Docket NumberNo. 86,86
PartiesJOSEPH F. GUFFEY et al., Petitioners, v. JAMES A. SMITH et al
CourtUnited States Supreme Court

Messrs. Joseph W. Bailey, J. H. Beal, and Robert J. Dodds for petitioners.

Mr. Jay A. Hindman for respondents.

[Argument of Counsel from pages 102-107 intentionally omitted] Mr. Justice Van Devanter delivered the opinion of the court:

This was a suit in equity, brought in the circuit court of the United States for the eastern district of Illinois by the holders of an oil and gas lease covering a small tract of land in Crawford county, Illinois, to enjoin operations under a later and similar lease, and to obtain a discovery and an accounting in respect of the oil and gas produced and sold in the course of operations already had. In due course the case was referred to a master, who took the evidence, reported the same with his conclusions upon questions of fact and law, and recommended a decree awarding the relief prayed, but taking no account of the gas theretofore used or sold. Exceptions to the report were filed by the defendants, and at the final hearing the circuit court overruled the exceptions, confirmed the report, and entered a decree as recommended. The decree was reversed by the circuit court of appeals with a direction that the bill be dismissed, the ground of decision being that the complainants were not entitled to relief in equity, and should be remitted to such remedy as they might have at law, because by the terms of their lease they had an option to surrender it at any time. 120 C. C. A. 436, 202 Fed. 106. Other questions in the suit were not considered by that court. The case is now here upon a writ of certiorari.

Both leases were for the same tract, and were given by James A. Smith, who owned it in fee simple. The earlier lease was given to one Walton, May 22, 1905, and by two successive assignments made in November and December following was transferred to Joseph F. Guffey and others, the complainants. It and the assignments were properly recorded June 15, 1906. The later lease was given to one Allison August 9, 1906, was assigned shortly thereafter to one Willett, and was transferred March 25, 1907, to Solley, Johnson, and Hennig, three of the defendants. There was also an intermediate lease to one Wilcox, given March 23, 1906, but as it was voluntarily surrendered and nothing is claimed thereunder, it suffices to say (a) that it contained a provision whereby the lessee therein agreed to protect the lessor against any expense or damage that might arise by reason of the earlier lease, (b) that before surrendering it Wilcox drilled a well upon the premises in an effort to find oil and gas, but without success, and (c) that the complainants, upon learning of this lease, promptly served upon Wilcox and the lessor a notice asserting the rights conferred by the prior lease.

Allison and his immediate assignee, Willett, took the subsequent lease with actual notice of the earlier one, and with constructive, if not actual, notice of its transfer to the complainants, but made no inquiry of the latter respecting its status or their claim under it. Nothing was done under the subsequent lease by Allison, but after its assignment to Willett the latter entered upon the premises, with the lessor's sanction, and drilled a well which yielded a flow of gas, but no oil. Upon learning of these drilling operations the complainants, in a written notice to Willett and the lessor, again asserted their claim under the prior lease, and demanded that the operations cease.

Solley and his associates took the assignment from Willett without actual knowledge of the prior lease, but, under the local law, were constructively charged with notice of it and of its transfer to the complainants, for both were duly recorded. They acted upon the advice of an abstractor who failed to make a proper examination of the records. After receiving the assignment, Solley and his associates, with the lessor's approval, proceeded to drill other wells upon the premises and developed the presence therein of oil in paying quantities. On August 1, 1907, they were actually and fully informed of the prior lease and of the complainants' purpose to insist upon the rights conferred by it and to obtain redress for the invasion of those rights, but they persisted in their drilling operations and produced and sold from the premises large quantities of oil. These operations were being continued when the suit was brought (March 24, 1908) and when the accounting was had before the master. Most of the oil taken from the premises was extracted and sold after August 1, 1907, the date when Solley and his associates were actually and fully informed of the complainants' claim.

In its terms the prior lease of May 22, 1905, under which the complainants claim, substantially conforms to one in common use in unexplored territory, as is shown by the evidence in this case and by reported decisions in other cases. It recites that it was given in consideration of $1 paid to the lessor and the covenants and agreements of the lessee therein set forth. It contains the usual words of grant and demise; runs to the lessee, Walton, his heirs and assigns; describes the purpose for which it was given as that of mining and operating for oil and gas and laying pipe lines and building tanks and other structures to take care of those substances when produced, and defines the terms for which it was to endure as five years from its date,' and as long thereafter as oil or gas or either of them is produced' from the premises. The lessee covenants and agrees therein, first, to deliver to the lessor, free of cost, in the pipe line to which the wells may be connected, the equal one-eighth part of all oil produced and saved from the premises; second, to pay $100 per year for the gas from each gas well the product of which is marketed and used off the premises; third, to locate all wells so as to interfere as little as possible with the cultivated portions of the land; and fourth, to complete a well on the premises within nine months after the date of the lease, or to pay at the rate of 25 cents per acre per year, quarterly in advance, for the additional time the completion of a well is delayed beyond the nine months, such payments to be made directly to the lessor, or deposited to his credit in the Exchange Bank, at Martinsville, Illinois. There is also a surrender clause to the effect that 'upon the payment of $1, at any time,' the lessee, his heirs or assigns, 'shall have the right to surrender this lease for cancelation, after which all payments and liabilities thereafter to accrue' thereunder 'shall cease and determine.'

Among the master's findings and conclusions which were approved by the circuit court were the following:

'The master further finds that the complainants have been at all times financially responsible and able to perform the covenants of their lease; that they have not drilled a well on said premises, but that they have paid all the rentals required by the terms of said lease to be paid, at the rate of 25 cents per acre, and deposited the same in the bank designated in the lease to receive the same, for the owner of the land.'

'That prior to purchasing the Allison lease, Willett made inquiry by telephone of the Exchange Bank, at Martinsville, whether or not rentals had been paid on the Walton lease by the complainants, and was informed by the bank that no such payments had been made or deposited to the credit of James A. Smith, although, as a matter of fact, the master further finds that, at the time the said bank gave this information, the rental money had in fact been deposited to the credit of the said James A. Smith.'

'That the Walton lease, under which complainants claim title, has never been forfeited for failure to comply with the terms thereof, and up to the time of the filing of this suit, no grounds existed whereby such a forfeiture could be declared.'

In addition to Solley and his associates, the defendants to the suit included the lessor and the Ohio Oil Company, the latter having purchased the oil with knowledge of the premises from which it was produced and of the complainants' claim under the prior lease.

It is settled by the decisions of the supreme court of Illinois that an oil and gas lease like that of the complainants passes to the lessee, his heirs and assigns, a present vested right—'a freehold interest'—in the premises, that this interest is taxable as real property, and that the clause giving the lessee an option to surrender the lease at any time is valid, does not create a tenancy at will or give the lessor an option to compel a surrender, and does not make the lease void as wanting in mutuality. Bruner v. Hicks, 230 Ill. 536, 540, 542, 120 Am. St. Rep. 332, 82 N. E. 888; Watford Oil & Gas Co. v. Shipman, 233 Ill. 9, 13, 14, 122 Am. St. Rep. 144, 84 N. E. 53; Poe v. Ulrey, 233 Ill. 56, 62, 64, 84 N. E. 46; Ulrey v. Keith, 237 Ill. 284, 298, 86 N. E. 696; People ex rel. Carrell v. Bell, 237 Ill. 332, 339, 19 L.R.A. (N.S.) 746, 86 N. E. 593, 15 Ann. Cas. 511; Daughetee v. Ohio Oil Co. 263 Ill. 518, 524, 105 N. E. 308. These decisions constitute rules of property and must be accepted and applied in passing upon the complainants' rights. McGoon v. Scales, 9 Wall. 23, 27, 19 L. ed. 545, 546; Bucher v. Cheshire R. Co. 125 U. S. 555, 583, 31 L. ed. 795, 798, 8 Sup. Ct. Rep. 974; Barber v. Pittsburgh, Ft. W. & C. R. Co. 166 U. S. 83, 99, 41 L. ed. 925, 933, 17 Sup. Ct. Rep. 488.

It also is settled that in the courts of Illinois the holder of such a lease cannot maintain an action of ejectment thereon (Watford Oil & Gas Co. v. Shipman, 233 Ill. 12, 122 Am. St. Rep. 144, 84 N. E. 53; Gillespie v. Fulton Oil & Gas Co. 236 Ill. 188, 206, 86 N. E. 219), and by reason of the legislation of Congress requiring that in actions at law in the Federal courts of first instance effect...

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