Finstrom v. First State Bank of Buxton

• Decision Date: 20 December 1994
• Docket Number: No. 940189,940189
• Citation: 525 N.W.2d 675
• Parties: Melvin FINSTROM, Plaintiff and Appellant, v. FIRST STATE BANK OF BUXTON, Defendant and Appellee. Civ.
• Court: North Dakota Supreme Court

Page 675

525 N.W.2d 675

Melvin FINSTROM, Plaintiff and Appellant, v. FIRST STATE BANK OF BUXTON, Defendant and Appellee.

Civ. No. 940189.

Supreme Court of North Dakota.

Dec. 20, 1994.

Richard Henderson (argued), Nilles, Hansen & Davies, Ltd., Fargo, for plaintiff and appellant.

John S. Foster (argued), Vaaler, Warcup, Woutat, Zimney & Foster, Grand Forks, for defendant and appellee.

NEUMANN, Justice.

Melvin Finstrom appeals from summary judgment dismissing his claims for royalties and damages stemming from the sale of gravel originally removed from his land. We reverse and remand.

The facts as alleged in the pleadings are complex. Because this is an appeal from summary judgment, we view the evidence in a light most favorable to the party against whom summary judgment is sought, in this case, Finstrom. Binstock v. Tschider, 374 N.W.2d 81, 83 (N.D.1985). The record indicates that Finstrom owned a parcel of land containing gravel deposits. In 1979 he entered into a lease with Wilson Jeffers (Jeffers) and Dale Schipper (Schipper) for the removal of gravel and reclamation of the land in return for royalties due and payable on the 15th day of the month following the sale of the severed gravel. The amount of royalty was to be determined by reference to the sales tickets generated when Jeffers and Schipper sold the extracted gravel. Jeffers purchased Schipper's interest in the lease in 1980. Jeffers extracted the gravel, reclaimed the land, and piled the gravel on the reclaimed land sometime around 1980. Jeffers then pledged his interest in the piled gravel as security for a loan extended by the First State Bank of Buxton (Bank). In 1982 Jeffers died and his estate surrendered his rights in the gravel to the Bank as settlement for the outstanding balance of the loan. In August of 1984 the Bank, as assignee of Jeffers' interest, exercised its option under the gravel lease to renew for another five years.

After Jeffers pledged the gravel as security, and before Jeffers' death, Finstrom borrowed money from the First State Bank of Buxton, and gave a mortgage on his property from which the gravel was extracted. Finstrom eventually defaulted on the loan, the mortgage was foreclosed, and the Bank purchased the land at the sheriff's sale. The one-year redemption period expired in July 1986, whereupon the Bank became the sole owner of both the Finstrom property as well as Jeffers' rights in the severed gravel.

Finstrom commenced this action by service of a summons and complaint October 1, 1992. The complaint, after being amended, alleged three different counts. Count one is contractual in nature and claims that the Bank breached its contract to pay royalties within one month after the sale of gravel. The complaint alleges that the first gravel was sold in the summer of 1989. Count two is based on conversion, and alleges the Bank converted Finstrom's interest in the gravel when it continued to sell the gravel and refused to pay the royalties. Count three alleges that the Bank breached its duty when it failed to diligently market the gravel.

All were dismissed in response to the Bank's summary judgment motion. The trial court found that the claims had accrued upon severance of the gravel, and therefore must be dismissed because the statute of limitations had expired prior to commencement of this action.

Finstrom appeals, claiming that for counts one and two (his contract and conversion claims) the statute had not yet expired, and for count three (his breach of duty to diligently market claim) there existed insufficient facts to support the court's conclusion that the statute had expired. We agree.

I. Statute of Limitations for Finstrom's Contract and Conversion Claims

Before determining whether the statute of limitations had expired on Finstrom's contract and conversion claims, we must determine what interest Finstrom appears to hold in order to determine when his rights accrued. From the facts as set forth in the record, it appears that Finstrom had a right to royalties under the lease with Jeffers for gravel mined on his land. We have held "that an unaccrued oil and gas royalty is an interest in real property." GeoStar Corp. v. Parkway Petroleum, Inc., 495 N.W.2d 61, 67 (N.D.1993). The gravel royalties in the instant case are analogous to petroleum royalties. Compare NDCC Sec. 38-11-01(2) (1987) with NDCC Sec. 38-11.1-03(5) (1987) (recognizing both oil and gas as well as all other "valuable inert lifeless substance[s] ... found within the earth" as minerals yet promulgating different regulations for their extraction); see also NDCC Sec. 47-10-24 (Supp.1993) (recognizing that when specifically included, gravel is treated like all other minerals). ¹ Before severance of the gravel, the unaccrued royalty was an interest in real property. GeoStar Corp., 495 N.W.2d at 67; see also Corbett v. La Bere, 68 N.W.2d 211, 214 (N.D.1955) (stating that royalties in oil and gas, until brought to the surface and reduced to possession are interests in real property). However, once Jeffers had extracted the gravel, Finstrom's royalty interest had accrued. See Black's Law Dictionary, 20-21 (6th ed. 1990) (defining "accrue" as meaning created, vested or matured). The severance of the gravel marks a change in the nature of any interest therein. "[A]n interest or right in accrued oil and gas royalties is personal property...." Corbett, 68 N.W.2d at 214, see also Federal Land Bank of St. Paul v. State, 274 N.W.2d 580, 583 (N.D.1979) (deciding for tax purposes that " 'produced' or 'severed' minerals are personal property, not real estate"); NDCC Sec. 41-09-05(1)(h) (Supp.1993) (defining "goods" for UCC purposes to include "all things which are movable at the time the security interest attaches," and not including "minerals or the like (including oil and gas) before extraction") (emphasis added); 58 C.J.S. Mines and Minerals Sec. 213 (1948) (stating that "it has usually been held that oil and gas rents and royalties are profits issuing out of the land; and, while they become personal property after they have accrued, until they accrue they are part of the estate remaining in the lessor"). Upon severance of the gravel, the royalty interest accrues and becomes a personal property interest.

The accrued royalty interest is an enforceable or matured right to payment at some time. The date of payment in the instant case is contractually controlled, and is calculated from the date of the sale of any portion of the severed gravel. The complaint alleges that failure to pay at the specified time constitutes a breach of the contract and forms the basis for this cause of action.

The complaint also...