Stoltz, Wagner & Brown v. Duncan

• Decision Date: 16 April 1976
• Docket Number: Civ. No. 75-0801-D.
• Citation: 417 F. Supp. 552
• Parties: STOLTZ, WAGNER & BROWN, a partnership, and Universal Resources Corporation, a corporation, Plaintiffs, v. J. Walter DUNCAN, Jr., an Individual, et al., Defendants.
• Court: U.S. District Court — Western District of Oklahoma

417 F. Supp. 552

STOLTZ, WAGNER & BROWN, a partnership, and Universal Resources Corporation, a corporation, Plaintiffs, v. J. Walter DUNCAN, Jr., an Individual, et al., Defendants.

Civ. No. 75-0801-D.

United States District Court, W. D. Oklahoma.

April 16, 1976.

COPYRIGHT MATERIAL OMITTED

H. B. Watson, Jr., Gregory L. Mahaffey, Oklahoma City, Okl., for plaintiffs.

Philip D. Hart, Ray G. Moss, Oklahoma City, Okl., for defendants.

MEMORANDUM OPINION

DAUGHERTY, Chief Judge.

In this case the Plaintiffs seek to quiet title in and to certain oil and gas leasehold estates in Section 1, Township 9 North, Range 10 West, Caddo County, Oklahoma against the Defendants. The Defendants by way of Counterclaim seek to quiet title in and to certain oil and gas leasehold estates in said Section against the Plaintiffs.

Plaintiffs claim that Defendants (1) had and have no standing as a lessee with reference to the drilling of a well in said Section, (2) had and have no operating rights in said Section under the pooling order of the Oklahoma Corporation Commission,¹ and, (3) have not drilled the well in said Section in good faith and with the diligence of a prudent operator thereby failing to hold any leasehold interests they may have owned.

Defendants counter by saying that Plaintiffs "top leased"² their leases in said Section; that said top leases are void as being in violation of the Rule Against Perpetuities as recognized in Oklahoma; that Defendants owned leasehold interests in said Section on or before August 6, 1975 by assignment of same from Apexco, Inc., and on or before August 7, 1975 Defendants possessed operating rights in said Section by a transfer thereof from Edwin L. Cox; that on or before August 6, 1975 the Defendants started the drilling of a well in said Section (known as the Harrision No. 1 well) as an oil and gas lessee possessing operator rights; that Defendants started said well in good faith during the primary terms of their leases which were "commencement" type leases³ and pursued the drilling of said well with the diligence of a prudent operator to total depth; that said well at time of trial is in the process of being completed as a producer and that by commencing the drilling of said well in good faith on said date and drilling said well as a prudent operator, Defendants' commencement type leases continue in force and effect are now in force and effect as against any rights of the Plaintiffs by virtue of their top leases.

RULE AGAINST PERPETUITIES

Of probable threshold importance in this controversy is Defendants' claim that Plaintiffs' top leases are wholly void as violating the Oklahoma Rule Against Perpetuities (hereafter sometimes referred to as the Rule). If this contention is correct and said leases are wholly void it would appear that Defendants should prevail herein as the Oklahoma rule applicable in this diversity action is that a plaintiff having no title or interest in the land (leasehold) in question cannot maintain an action to quiet title thereto. Pauline Oil & Gas Co. v. Fischer, 191 Okl. 346, 130 P.2d 305 (1942); Robertson v. Knighten, 192 Okl. 678, 139 P.2d 601 (1943). A federal court will look to the law of the state where the land lies to determine a plaintiff's standing to maintain an action to quiet title. Williams v. Pacific Royalty Company, 247 F.2d 672 (Tenth Cir. 1957); Midwestern Developments Inc. v. City of Tulsa, Oklahoma, 374 F.2d 683 (Tenth Cir. 1967); Dudley v. Meyers, 422 F.2d 1389 (Third Cir. 1970). Plaintiffs appear to subscribe to the foregoing for they assert that if Defendants had no leasehold interests in Section 1 on or before August 10, 1975⁴ they cannot raise the invalidity of Plaintiffs' top leases for violating the Rule, citing 70 C.J.S. Perpetuities § 80, p. 684.

Oklahoma recognizes the Rule Against Perpetuities. Article II, Section 32 of the Constitution of Oklahoma provides in part as follows:

"Perpetuities and monopolies are contrary to the genius of a free government, and shall never be allowed, . . ."

The Oklahoma Supreme Court in Melcher v. Camp, 435 P.2d 107 (Okl.1967) held that the Rule Against Perpetuities has common law application in Oklahoma with this language:

". . . No interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest."

Also see Cities Service Oil Co. v. Sohio Petroleum Co., 345 F.Supp. 28 (W.D.Okl. 1972); Francis v. Superior Oil Co., 102 F.2d 732 (Tenth Cir. 1939).

In 1971 the Oklahoma Legislature passed the following Statutes:

60 Oklahoma Statutes § 75

Reformation of interests violating Rule Against Perpetuities — Intent

"Any interest in real or personal property that would violate the Rule Against Perpetuities shall be reformed, or construed within the limits of the Rule, to give effect to the general intent of the creator of that interest whenever that general intent can be ascertained. This provision shall be liberally construed and applied to validate such interest to the fullest extent consistent with such ascertained intent.

60 Oklahoma Statutes § 76

Construction in accordance with cy pres doctrine

"To effectuate the provisions hereof, all courts of this state are, within their otherwise jurisdictional limits, hereby granted the power to reform or construe interests in real or personal property, as provided in Section 1 hereof, in accordance with the doctrine of cy pres.

60 Oklahoma Statutes § 77

Reformation of offending instruments

"If an instrument violates the Rule Against Perpetuities, but can be reformed or construed in accordance with the provisions of this act, it shall not be declared totally invalid. Rather, the provisions thereof that do not offend the Rule shall be enforced, and only the provisions thereof that do violate, or might violate, the Rule shall be subject to reformation or construction under the doctrine of cy pres within the terms of this act."

Plaintiffs' top leases taken in June, 1975 in part provide:

"TO HAVE AND TO HOLD the same (subject to the other provisions herein contained) for a term of one (1) year from and after the 8th day of August, 1975, or from and after the expiration of the existing oil and gas lease, whichever is the later, hereafter called `primary term' and as long thereafter as oil, gas, gas condensate, gas distillate, casinghead gas, casinghead gasoline and other minerals may be produced from said leased premises or operations for the drilling and production thereof are continued as hereinafter provided."

The top leases provide disjunctive dates for the commencement of the one year term. No problem exists with the Rule regarding the first of these commencement dates, namely, "the 8th day of August, 1975." In all events this would be a vesting and commencement within the perpetuity period of some life in being and 21 years thereafter. However, if the base leases (which have been top leased) were extended by production in the primary term or by the commencement of a well in the primary term followed by production, the one year primary term of the top leases under either commencement date could not commence until after the expiration of the existing oil and gas leases. In this connection it should be recognized that the Plaintiffs took the gamble in top leasing in this section, that the holders of the base leases they topped would not obtain production within the primary terms of their leases or commence a well within the primary terms of their leases followed by production. Thus, if the existing leases were permitted to expire Plaintiffs' top leases would take effect on August 8, 1975 but if the existing leases are extended by drilling operations and production the top leases would not take effect until an unknown date in the future, namely, "from and after the expiration of the existing oil and gas lease." With production being obtained in the primary term or a well being commenced in the primary term, followed by production, Plaintiffs lost their gamble and must lose their quest to quiet their title against the leases they topped. Hence, the top leases were not wholly void when taken in June, 1975 as violating the Rule because the one year primary term could commence under the first alternative, specifically on August 8, 1975. That provision does not violate the Rule.

The second disjunctive proviso for the commencement of the top leases, namely, "to have and to hold . . . for a term of one (1) year . . . from and after the expiration of the existing oil and gas lease, whichever is the later," appears to violate the Rule Against Perpetuities. The Rule is violated when there is a possibility of vesting beyond the perpetuity period. Melcher v. Camp, supra, 435 P.2d at page 115. The top leases were taken in June of 1975 when there were existing base leases, the primary terms of which would expire in August of 1975. Hence, the possibility existed in June, 1975 that a well could be commenced before the expiration of the existing base leases, the same could be drilled to production and the ensuing life of production could possibly exceed the period permitted by the Rule. The second alternative provision in the top leases thus appears to violate the Rule unless the top leases are reformed under the foregoing statutory authority.

At this time the second proviso would be the later of the two alternatives provided for in the top leases if the terms of Plaintiffs' leases did not commence on August 8, 1975. Thus, if the existing base leases are continued by the commencement of a well the second proviso if enforced would determine when the top leases start and as they may not start within the perpetuity period they violate the Rule and are void unless they may be reformed under 60 Oklahoma Statutes §§ 75-77, supra. In this connection counsel for Plaintiffs at arguments agreed that Plaintiffs may not wait until the Harrison Well (assuming it becomes a producer) ceases to produce which could be...