Herigstad v. Hardrock Oil Co.

• Decision Date: 27 November 1935
• Docket Number: 7447.
• Citation: 52 P.2d 171,101 Mont. 22
• Parties: HERIGSTAD v. HARDROCK OIL CO.
• Court: Montana Supreme Court

52 P.2d 171

101 Mont. 22

HERIGSTAD v. HARDROCK OIL CO.

No. 7447.

Supreme Court of Montana

November 27, 1935

Appeal from District Court, Toole County; R. M. Hattersley, Judge.

Action by O. B. Herigstad against the Hardrock Oil Company. From an adverse judgment, the defendant appeals.

Judgment affirmed.

S. C Ford, of Helena, and Larue Smith, of Great Falls, for appellant.

Louis P. Donovan, of Shelby, for respondent.

MATTHEWS Justice.

The defendant, Hardrock Oil Company, a Montana corporation, has appealed from a judgment in favor of the plaintiff, O.

B Herigstad, on the pleadings setting up and admitting the following facts:

In 1921, one Guy Craig secured from the federal government a permit to prospect a quarter section of land for oil and gas and, on May 24, 1926, entered into an "operating agreement" with one William D. Campbell, trustee. By the terms and conditions of this agreement Craig granted to Campbell the sole and exclusive right of possession of the north half of the quarter section for the purpose mentioned in the permit, and agreed to apply for and, if possible, obtain a lease from the government at the proper time, reserving to the government a 5 per cent. royalty, and to assign the lease to Campbell on demand. Campbell agreed to do and perform all things required of Craig by the permit and to pay Craig 15 per cent. of all oil or gas produced and saved by the operation, and, within 35 days after completion of a well which will produce 500 barrels of oil on a 30-day test, to pay Craig "or order" $2,000 in cash. The document concludes with the agreement that, subject to the laws and regulations of the United States, the "assignment of the rights, obligations, covenants and benefits hereof shall extend to and bind, or inure to the benefit of, the heirs, successors and assigns of the parties hereto." The instrument was duly recorded on June 1, 1926. Also, on May 24, 1926, Craig assigned to this plaintiff his contingent right to receive the $2,000 compensation.

On May 26, 1927, Campbell, trustee, assigned, conveyed, and transferred to Magic City Oil Company "all his right, title and interest in and under" the operating agreement, and, on October 26, 1927, the Magic City Oil Company entered into an "operating agreement" with the defendant company. This agreement designates the Magic City Oil Company as the "owner" and the defendant the "operator." It recites the issuance of the permit to Craig and the fact of his entering into the operating agreement with Campbell, trustee, and declares that the same was "regularly assigned unto the said owner" by Campbell, trustee, and that the "owner" has succeeded to all the rights "of Campbell, trustee," and is "now vested with all the oil and gas rights in and to the lands last above described and is now entitled to eighty per cent (80%) of all oil and gas that may be produced from said lands, together with the right to possess said lands *** for development purposes." This agreement specifically provides that "the operator [this defendant] agrees to comply with all the terms and conditions of the prospecting permit and the operating agreement hereinabove referred to and with the terms and conditions of any Government lease that may be issued pursuant to said prospecting permit insofar as said prospecting permit, operating agreement, and subsequent leases cover the land included within this contract and upon its failure to do so, or upon the operator's failure to comply with the terms and conditions hereof, it shall forfeit all right hereunder, and shall re-convey to the owner all rights covered by this contract."

After the execution of this contract, the defendant entered upon and took possession of the lands described and drilled a well thereon which was completed on or about the 4th day of February, 1928, and which, on a 30-day test, produced more than 500 barrels of oil.

On March 1, 1928, Craig secured from the government an oil and gas lease upon the quarter section mentioned in his permit, and on July 18, 1928, assigned the lease, subject to the approval of the Secretary of the Interior, to this defendant, and it assumed, and agreed to discharge, any and all obligations resting on Craig under the Craig-Campbell operating agreement. This assignment reserved to Craig a 15 per cent. royalty from the north half of the quarter section mentioned in the operating agreement, and a 12 1/2 per cent. royalty from the south half of the quarter section. As more than 35 days had elapsed after the bringing in of the well and before the assignment of the lease, the $2,000 mentioned in the operating agreement became due and payable before the assignment of the lease; this sum was not mentioned in the assignment. No part of the $2,000 having been paid, plaintiff, on January 15, 1930, brought action to recover that amount, with interest from and after March 10, 1928, and for costs. On these facts, properly pleaded and not controverted, the court rendered its decision and entered judgment in favor of the plaintiff.

The position taken by the defendant is that the prospecting permit did not vest in Craig any interest in the lands described; that the contingent agreement to pay the $2,000 was not a covenant running with the land; that the assignment of the Craig-Campbell operating agreement to the Magic City Oil Company did not render the assignee personally liable for moneys thereafter to become due, regardless of the fact that the contract purported to bind the assignees of the respective parties, and that this agreement was not assigned to the defendant; that defendant did not agree to pay any money to the plaintiff as Craig's assignee; and that the court's findings and judgment cannot be affirmed on any theory of liability. It is further suggested that the failure of the defendant to make payment should only give rise to a forfeiture of its rights under the operating agreement. The defendant contends that authorities cited sustain this position and particularly that "the precise situation obtaining between appellant and respondent is illustrated and the rights of the parties determined by the case of Pen-O-Tex. O. & L. Co. v. Big Four O. & G. Co. (C.C.A.) 23 F.(2d) 154, which decision is peculiarly applicable and is controlling of the question here presented."

Parenthetically it may be said that decisions of sister states, when applicable, may be persuasive, but are never "controlling." However, after a careful reading of the decision thus relied upon, we are of the opinion that it is not even persuasive here, due to the marked difference in fact conditions upon which the declarations relied upon by defendant are based. There the owner of a large tract of land leased to one Kukendall, who assigned a portion of his lease to one Cranston; the latter entering into a separate contract to drill on the premises. Cranston assigned his portion of the lease and his drilling contract to the Pen-O-Tex Company. "Pen-O-Tex then entered into a contract with Fairchild (extending to their heirs, successors, etc.) whereby he engaged to drill the well," but no well was drilled within time, whereupon Pen-O-Tex entered into a contract with the Pittsburg Western whereby it agreed to sell and assign a portion of its leased sections to the latter "with an understanding by that company to assume all the obligations of the Pen-O-Tex in the drilling contracts. This contract *** did not extend to their successors and assigns." The Pittsburg Company on the same day entered into a like contract with the Big Four agreeing to sell and assign a half interest in the sections "now owned" by it; the latter agreeing to assume its proportion of the former's obligations to the Pen-O-Tex. No well was drilled and no rent paid, and suit for damages was instituted. The plaintiff's contention that "every successive assignee of a lease, however remote in the devolution of the leasehold title, is liable to a preceding holder on an obligation of the lease breached during their joint interest and consequent privity of estate" was held untenable for the following reasons: "The doctrine of covenants running with the land is based on an essential legal fact that some estate to which the covenant may attach as its vehicle or conveyance has been transferred." There was a drilling contract, but no assignment of any portion of the lease, as the defendant and its predecessor did merely "agree to sell and assign"; the court declaring that "an agreement merely to assign a lease is not an assignment of the lease itself, for in such an agreement no present transfer of the estate or of a lesser interest in the estate is intended or involved. In consequence such an agreement does not establish privity of estate in the parties or cause covenants of the lease to run to either of them." The defendant asserts that this decision is applicable because Craig agreed to assign the government lease when secured, and no lease was secured until after the defendant discovered oil; but the two cases differ in this: In the Pen-O-Tex O. & L. Co. Case, the lessor was held to have assigned no interest in the "estate" but merely to have agreed to assign at some future day--an executory contract. Here Craig assigned all that he had--the right of exclusive possession of the lands described for the purpose of prospecting for oil and gas.

The "prospecting permits" issued under authority of the Act of Congress (Feb. 25, 1920, chap. 85, § 13, 41 Stat. 441, 30 U.S.C.A. § 221) constitute more than a license to the permittee, and, if exclusive possession for a definite period creates an interest in land, they have this effect, for such a permit grants, in writing, "the exclusive right, for a period not exceeding two years, to prospect for oil or gas"...