Page v. Fees-Krey, Inc.

• Court: Colorado Supreme Court
• Writing for the Court: LOHR; HODGES; ROVIRA; HODGES
• Citation: Page v. Fees-Krey, Inc., 617 P.2d 1188 (Colo. 1980)
• Decision Date: 06 October 1980
• Docket Number: 79SC45
• Parties: J. H. PAGE, Jr., Petitioner, v., a Colorado Corporation, Monarch Enterprises, Inc., a ColoradoCorporation, Walter S. Fees, Jr., Max Krey, Robert S. Hawkins, and WilliamRippy, Respondents.

Page 1188

617 P.2d 1188

J. H. PAGE, Jr., Petitioner, v. FEES-KREY, INC., a Colorado Corporation, Monarch Enterprises, Inc., a ColoradoCorporation, Walter S. Fees, Jr., Max Krey, Robert S Hawkins, and WilliamRippy, Respondents.

No. 79SC45.

Supreme Court of Colorado, En Banc.

Oct. 6, 1980.

Rehearing Denied Nov. 3, 1980.

Paul C. Lennartz, Samuel L. McClaren, Denver, for petitioner.

Dufford, Waldeck & Williams, Hugh D. Wise, Grand Junction, for respondents.

LOHR, Justice.

We granted certiorari to review a decision of the court of appeals ¹ which reversed a judgment of the district court that J. H. Page, Jr. (Page, Jr.), is the owner of a two percent overriding royalty interest in a federal oil and gas lease. We reverse the decision of the court of appeals.

The material facts are not in dispute. In 1951 the United States, as lessor, entered into an oil and gas lease with Marie Maroney, as lessee, covering certain real property in Rio Blanco County, Colorado.

In 1955 Phillips Petroleum Company (Phillips) acquired all of the lessee's interest in the lease. In February and March 1960 Phillips transferred ² to Page, Jr., an undivided one-half interest in the working and operating rights as to certain horizons and substances ³ under a portion of the leased lands. In April 1960 Page, Jr., assigned the interest acquired from Phillips to J. H. Page, Sr. (Page, Sr.), reserving a two percent overriding royalty interest. It is this reserved interest which is the subject of this case.

In May 1960 Page, Sr., assigned an undivided one-fourth of his interest to H. K. Beardmore, Jr. (Beardmore), expressly subject to Page, Jr.'s overriding royalty interest.

In July 1966 Phillips assigned its other undivided one-half interest in the lease to Shawnee Oil Development Co., Inc. (Shawnee). In August 1966 Page, Sr., and Beardmore assigned their undivided one-half interest in the lease to Shawnee, subject to "any and all outstanding overriding royalties or other burdens on production, which shall be assumed by Shawnee"; that assignment does not refer specifically to Page, Jr.'s two percent overriding royalty.

Thereafter, Shawnee assigned the lease to Fees-Krey, Inc. (Fees). Although other transfers were made, they do not enter into the dispute between the parties and are not referred to in this opinion. ⁴

Except for the lease from the United States to Marie Maroney, none of the material documents were recorded in the office of the County Clerk and Recorder of Rio Blanco County, Colorado (county records). However, all of those documents were filed in the office of the United States Department of the Interior, Bureau of Land Management, in Denver, Colorado (BLM records).

In 1972 Page, Jr., learned of production under the lease and demanded payment based upon his two percent overriding royalty. Fees refused to recognize Page, Jr.'s claim, and instead filed a quiet title action against Page, Jr., seeking a decree quieting title in Fees free from Page, Jr.'s two percent overriding royalty. Page, Jr., counterclaimed, seeking to quiet title in himself to the two percent overriding royalty.

The trial court found that neither Shawnee nor Fees had actual or constructive notice of Page, Jr.'s overriding royalty at the time each acquired its respective interest, and that Page, Jr., had not abandoned the overriding royalty but had demanded payment soon after learning of production. The trial court concluded that the Colorado recording act, section 38-35-109, C.R.S.1973, ⁵ is a "race-notice" statute. The court reasoned that, as Fees had not recorded its assignment in the county records before receiving notice of Page, Jr.'s claim, Fees took its interest subject to Page, Jr.'s two percent overriding royalty interest. Fees appealed.

The court of appeals concluded that the Colorado recording act is a "pure notice" statute and that, therefore, Fees having purchased without actual notice of Page, Jr.'s overriding royalty, should prevail. The court of appeals also rejected Page, Jr.'s argument that the filing of the material documents in the BLM records gave constructive notice to Fees of the overriding royalty.

Four principal questions are presented for our consideration in reviewing the decision of the court of appeals:

1. Is Fees charged with notice of, and bound by, the reservation of the two percent overriding royalty in an instrument in his chain of title even though that instrument was not recorded in the county records?

2. Did Fees acquire the lease free from the burden of the overriding royalty of Page, Jr., by operation of the Colorado recording act?

3. Is Fees charged with notice of, and bound by, the documents filed in the records of the Bureau of Land Management?

4. Was the two percent overriding royalty interest extinguished by merger when Shawnee acquired all other interests in the lease?

The first three questions are interrelated.

The parties also have vigorously disputed whether the Colorado recording act is a "race-notice" or a "pure notice" statute. Although our resolution of the other issues makes it unnecessary to reach that question, we conclude that the dissenting opinion correctly analyzes and answers it.

I.

The law is well settled that, unless otherwise provided by statute, a purchaser is bound by recitals in conveyances or other instruments of transfer in his chain of title. See 8 C. Thompson, Commentaries on the Law of Real Property § 4310 (1963 Repl.Vol.) (hereinafter cited as Thompson ); 2 R. Patton & C. Patton, Patton on Land Titles § 604 (1957) (hereinafter cited as Patton ). This rule applies even when the instrument containing the recitals is not recorded. Carter v. Thompson, 167 Ark. 272, 267 S.W. 790 (1925); Green v. Maddox, 97 Ark. 397, 134 S.W. 931 (1911); Baker v. Mather, 25 Mich. 51, 53 (1872); Stees v. Kranz, 32 Minn. 313, 20 N.W. 241 (1884); Runge v. Gilbrough, Tex.Civ.App., 87 S.W. 832 (1905); see Elk Horn Bank & Trust Co. v. Spraggins, 182 Ark. 27, 30 S.W.2d 858 (1930); Bailey v. Southern Ry. Co., 112 Ky. 424, 60 S.W. 631 (1901); Savings, Building & Loan Association v. McClain, 18 Tenn.App. 292, 76 S.W.2d 650 (1934); Steed v. Crossland, 252 S.W.2d 784 (Tex.Civ.App.1952); 2 J. Pomeroy, A Treatise on Equity Jurisprudence §§ 626, 628 (1941); 8 Thompson § 4310; 5 H. Tiffany, The Law of Real Property § 1293 (1939); 77 Am.Jur.2d, Vendor and Purchaser § 667, 92 C.J.S. Vendor and Purchaser § 331; contra, Ebling Brewing Co. v. Gennaro, 189 App.Div. 782, 179 N.Y.S. 384 (1919).

In Green v. Maddox, supra, the rule is stated as follows:

"As is said in the case of Stees v. Kranz, 32 Minn. 313 (, 20 N.W. 241): 'No rule is better settled than this, that one is bound by whatever, affecting his title, is contained in any instrument through which he must trace title, even though it be not recorded, and he have no actual notice of its provisions.' Every purchaser who holds under a conveyance through which he must trace his title is bound by whatever is contained in it. It is his imperative duty to obtain and examine all the instruments which constitute essential links in his chain of title, and he is conclusively presumed to know all the recitals and matters contained therein affecting the title or the estate, whether they are recorded or not. 2 Devlin on Deeds, § 1001; 2 Pomeroy, Eq.Jur., § 626; Blake v. Tucker, 12 Vt. 39; Robbins v. McMillan, 26 Miss. 434."

97 Ark. at 403, 134 S.W. at 933.

The rule has been narrowed in Colorado by a curative statute. The statute provides that, where a recorded instrument affecting title to real property contains a recital referring to an unrecorded instrument purportedly affecting that title, that reference does not bind anyone other than the parties to the recorded instrument and does not place any other persons on inquiry. Section 38-35-108, C.R.S.1973. ⁶ See Rocky Mountain Fuel Co. v. Clayton Coal Co., 110 Colo. 334, 134 P.2d 1062 (1943). The general rule, and not the statutory exception, applies in the present case for two reasons. First, the assignment in which the overriding royalty interest was reserved was not recorded, so the curative statute is not applicable by its own terms. Even more importantly, the language in the transfer by Page, Jr., to Page, Sr., Fees' remote transferor, is more than a mere recital referring to some other instrument by which Page, Jr.'s overriding royalty interest was created; it is the operative language by which the overriding royalty interest was created by reservation. Fees is bound by that reservation. See 8 Thompson § 4310 and other authorities cited above.

II.

This result is not inconsistent with the policies underlying the recording acts. At common law, as between two legal interests such as the working interest of Fees and the overriding royalty interest of Page, Jr., the first in time was first in right. A grantor could transfer no more than he owned. See 8 Thompson § 4290; Aigler, The Operation of the Recording Acts, 22 Mich.L.Rev. 405 (1924). Recording acts have been enacted in response to a need to provide protection for purchasers of real property against the risk of prior secret conveyances by the seller. See 8 Thompson § 4290; Storke & Sears, The Perennial Problem of Security Priority and Recordation, 24 Rocky Mtn.L.Rev. 180, 188 (1952). Very generally, they permit a purchaser to rely on the condition of title as it appears of record. See 8 Thompson § 4291. They also promote creation of an accessible history of title. ⁷

In the present case there was no apparent record chain of title in Shawnee, Fees' immediate assignor. The only relevant instrument of record in Rio Blanco County was the lease from the United States to Marie Maroney. Not even the assignments to Shawnee, the immediate assignor of Fees, were of record. Fees could not have relied on the condition of record title in acquiring its interest. ⁸ The policy that a purchaser should be able to rely on the condition of title as it appears of record is not...