Calcote v. Texas Pac. Coal & Oil Co.

• Decision Date: 18 November 1946
• Docket Number: No. 11549.,11549.
• Citation: 157 F.2d 216,167 ALR 413
• Parties: CALCOTE v. TEXAS PAC. COAL & OIL CO.
• Court: U.S. Court of Appeals — Fifth Circuit

167 ALR 413, 157 F.2d 216 (1946)

CALCOTE v. TEXAS PAC. COAL & OIL CO.

No. 11549.

Circuit Court of Appeals, Fifth Circuit.

July 31, 1946.

Rehearing Denied September 10, 1946.

Writ of Certiorari Denied November 18, 1946.

Chas. F. Engle, of Natchez, Miss., and Forrest B. Jackson, of Jackson, Miss., for appellants.

William H. Watkins, of Jackson, Miss., and David B. Trammell and Eugene T. Adair, both of Fort Worth, Tex., for appellee.

Before HUTCHESON, HOLMES, and LEE, Circuit Judges.

Writ of Certiorari Denied November 18, 1946. See 67 S.Ct. 205.

HOLMES, Circuit Judge.

This action was brought by appellants to cancel a lease to explore for oil, gas, and other minerals. A counterclaim was filed by appellee (defendant and leaseholder) to declare and confirm its rights under the lease. The decisive question presented on this appeal is whether the lease, which was obtained by appellee while it was unlawfully doing business in Mississippi as a foreign corporation, was ratified by the innocent party, or adopted by mutual consent, after the guilty party to the contract had become legally qualified to do business in the state.

The lease was executed on June 1, 1939. It was in standard form, and was to run for a primary term of ten years from date, conditioned upon the payments of annual delay-rentals, which were to be excused during the period of production. On January 2, 1940, the appellee qualified to do business in Mississippi. In May, 1940, 1941, 1942, 1943, and 1944, respectively, the appellee mailed to appellants checks for the annual delay-rentals of $60. These checks and the accompanying letters made specific references to the lease. The checks were endorsed and cashed; each time a receipt at the foot of the letter was signed by appellants.

The court below found that the lease was executed while the appellee, a foreign corporation, was engaged in business in Mississippi without having qualified to do so as required by the state statute.¹ The court held that the appellants ratified the lease by accepting the delay-rentals and disposing of the greater part of their royalty interests after the appellee had become legally qualified to do business in the state. The correctness of this ruling is questioned on appeal.

Appellants argue that under local law² the lease was void when executed, and being void was not subject to ratification. Appellee contends that the lease was voidable, not void, and being voidable could be and was ratified. The primary question for decision on the merits is as to the validity of the lease. It appears that mineral interests in the land were conveyed, subject to the lease, by appellants to several grantees who were not made parties plaintiff or defendant.

On the threshold of this appeal is the decisive issue as to whether these royalty grantees were indispensable parties. According to the record, they acquired from the Calcotes an interest, not only in the royalties reserved by them as lessors in the lease to the appellee, but also in any other lease that might be executed by them covering the land in question. They are, therefore, interested in the prayer for the cancellation of the lease, since cancellation would destroy their royalties existing in praesenti, and the Calcotes might not see fit to make another mineral lease or to develop and operate the aforesaid lands for minerals. On the other hand, while improbable, it may be to the advantage of the royalty grantees to have the lease confirmed. This is not a question of law but of fact, and there is no evidence in the record to give the answer to it, because the royalty grantees have not been made parties to this action. The fact that their interests may not have been prejudicially affected by the final judgment below, which was rendered after a trial on the merits, is not controlling, because the question of indispensable parties, and particularly of diversity jurisdiction, does not depend upon the result of the suit. The true test is the situation that existed before and not after entry of the final judgment.

In diversity cases, the question of indispensable parties is inherent in the issue of federal jurisdiction, the determination of which should never await a decision on the merits if the complaint states a cause of action. Jurisdictional questions come first in the orderly disposition of a case. A precarious jurisdiction that limits the scope of judicial decision on the merits cannot be entertained. The same limitation would restrict review on appeal, even on certiorari, and no one could tell whether the court had jurisdiction until it had determined the merits of the controversy. The cases cited by appellee in its supplemental brief, to the effect that the judgment rendered would not interfere with any rights of the royalty owners, may be distinguished from the instant case because they have reference to rights that would continue to exist irrespective of the outcome of the suit.

It is argued that appellee has not raised the question, and that appellants may not now object, having brought the suit without joining indispensable parties as plaintiffs or defendants; but it was within the power of the court below to raise the issue of its own motion, since federal jurisdiction depended wholly upon diversity of citizenship and it was impossible to determine whether such diversity existed unless all indispensable parties were before the court and the citizenship of each was a matter of record. Section 50 of the Judicial Code³ and rule 19(b) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 732c, do not apply to indispensable parties, who must be made parties to the suit even though this will defeat federal jurisdiction.⁴

Subject to the provisions of rule 23 and subdivision (b) of rule 19, subdivision (a) of rule 19 provides that "persons having a joint interest" shall be made parties and be joined on the same side as plaintiffs or defendants. If a person who should join as a plaintiff refuses to do so, he may be made a defendant or, in proper cases, an involuntary plaintiff.⁵ What then constitutes the joint interest of appellants and their royalty grantees?

By separate royalty deeds the Calcotes sold, granted, and conveyed unto one Stechol an undivided 1/16 interest, unto Smith an undivided ½ interest, and unto Wherritt an undivided 3/16 interest, in and to all the royalty, gas royalty, and royalty in casinghead gas, gasoline, and royalty in other minerals in and under, and that may be produced and mined from, the following described lands (describing them), together with the right of ingress and egress at all times for the purpose of mining, drilling, and exploring said lands for oil, gas, and other minerals, and removing the same therefrom. These grants ran for 20 years and as long thereafter as oil, gas, or other minerals, were produced in paying quantities. Each grant provided:

"Said land, or portions thereof, being now under oil and gas lease executed in favor of The Texas Pacific Coal and Oil Company it is understood and agreed that this sale is made subject to the terms of said lease, but covers and includes one-half one-sixteenth, or three sixteenths, respectively, of all the oil royalty, and gas royalty, and casinghead gas and gasoline royalty and royalty from other minerals or products, due and to be paid under the terms of said lease."

Under these deeds the grantees acquired the right to participate in the royalties under the present lease and under all future leases. Their right is restricted to a portion of the minerals produced, with no right to join in future leases or to receive any part of the bonus or delay-rentals. Their interest is a perpetual nonparticipating fractional royalty in the oil, gas, or other minerals, that may be produced from said lands.⁶

Doubtless all will admit that the Calcotes have only an undivided one-fourth of one-eighth royalty in the minerals so long as the present lease is in force and effect. It is a fractional mineral interest in the whole tract distinct from their contingent reversionary interest.⁷ It would not be possible to cancel this lease without destroying the undivided three-fourths royalty interest therein owned by the above named individuals who have not been made parties to this suit. Therefore no decree can be entered in this case in accordance with the prayer of the complaint without annulling the vested rights of absent parties whose presence might deprive the court of jurisdiction. The leasing contract was an entirety, and from its nature could not be cancelled as to the Calcotes and allowed to stand as to the other royalty owners. The lessors and their grantees were, technically and beneficially, joint owners of a common property, each with an undivided interest in every particle of the minerals. None of them owned a single molecule in severalty. The relation of the royalty grantees to the controversy over the validity of this lease was so direct and vital that no adequate judgment could be entered without affecting their interests. If it had been cancelled as to the Calcotes, it would have been cancelled as to their grantees, because a royalty interest under an invalid lease is a nullity. Since it was confirmed as to the Calcotes, it stands confirmed as to the grantees in practical effect, as only the lessee can explore the lands for minerals during the term of the lease. We are unable to say that the royalty grantees were not injuriously affected by confirmation of the lease. They were entitled to be heard on the subject. Their presence was absolutely, not conditionally, necessary.⁸ No court can directly adjudicate upon a person's rights without such person being actually or constructively before it.⁹

The counterclaim, whether federal jurisdiction of it be ancillary or independent, must fail for the same reasons. It would be hard to find a better illustration of indispensable parties than is afforded by the instant case. It is...