Segelke v. Kilmer

• Court: Colorado Supreme Court
• Writing for the Court: McWILLIAMS; HALL, C. J., and DAY
• Citation: Segelke v. Kilmer, 360 P.2d 423, 145 Colo. 538 (Colo. 1961)
• Decision Date: 06 March 1961
• Docket Number: No. 19019,19019
• Parties: Frederick W. SEGELKE, Plaintiff in Error, v. Glenn E. KILMER, Bessie Kilmer, Cecil Nicholson, The Ohio Oil Company, R. L. Carruthers, Charles S. Lavington, John R. Moran, F. H. Gower, Fred Goodstein, Harold D. Writer, Herbert A. Writer, Russell M. Writer, Clarence E. Manion, Vern H. Simmons, Jack Rouse, Max L. Krueger, The Denver National Bank of Denver, Colorado, Trigood Oil Company, The Federal Land Bank of Wichita, Wichita, Kansas, The Carter Oil Company, Paul Long and Ruth Nicholson, Defendants in Error.

Page 423

360 P.2d 423

145 Colo. 538

Frederick W. SEGELKE, Plaintiff in Error, v. Glenn E. KILMER, Bessie Kilmer, Cecil Nicholson, The Ohio Oil Company, R. L. Carruthers, Charles S. Lavington, John R Moran, F. H. Gower, Fred Goodstein, Harold D. Writer Herbert A. Writer, Russell M. Writer, Clarence E. Manion Vern H. Simmons, Jack Rouse, Max L. Krueger, The Denver National Bank of Denver, Colorado, Trigood Oil Company, The Federal Land Bank of Wichita, Wichita, Kansas, The Carter Oil Company, Paul Long and Ruth Nicholson, Defendants in Error.

No. 19019.

Supreme Court of Colorado, In Department.

March 6, 1961.

Rehearing Denied April 3, 1961.

Haffke & Johnson, Fort Morgan, Fred M. Winner, Warren O. Martin, Denver, for plaintiff in error.

Sandhouse & Sandhouse, Sterling, for defendants in error Glenn E. Kilmer and Bessie Kilmer.

Moran, Reidy & Voorhees, Denver, for defendants in error Max L. Krueger and others.

McWILLIAMS, Justice.

Prior to April 18, 1944 Bessie Kilmer, who was plaintiff in the trial court, owned 326 acres of unencumbered farm land situated in Logan County, State of Colorado. On that date she entered into an oil and gas lease with The Ohio Oil Company covering the entire 326 acres. This lease was for a term of ten years, and provided, inter alia, that the lessee should pay the lessor the proceeds from one-eighth (1/8) of all oil and gas produced and sold from the leased premises at the prevailing market price therefor at the wells and further provided for the payment of fifty cents (50cents) per acre as 'rental' for the privilege of deferring drilling beyond the first year of the lease, and payment of a like sum for the privilege of deferring actual drilling for like annual periods thereafter. The lease also contained a so-called 'entirety clause' which provides as follows:

'If the leased premises shall hereafter be owned in severalty, or in separate tracts, the premises, nevertheless, shall be developed and operated as one lease, and all rents and royalties accruing hereunder shall be treated as an entirety and shall be divided among and paid to the separate owners in the proportion that the acreage owned by each such owner bears to the entire leased acreage. There shall be no obligation on the part of the lessee to off-set wells on separate tracts into which the land covered by this lease may be hereafter divided by conveyance, lease or otherwise or to furnish separate measuring or receiving tanks. It is agreed that in the event this lease shall be assigned as to a part or parts of the above described lands and default shall be made in the payment of the proportionate part of the rent due upon any such part, such default shall not operate to defeat or affect this lease insofar as it covers a part or parts of said land upon which payments of said rentals shall be made.'

On March 6, 1947 Bessie Kilmer conveyed by warranty deed for a consideration of $1,000 approximately 160 acres of the leased land to her brother, Cecil Nicholson, who was a defendant in the trial court. This warranty deed provided that title to the premises described in the deed was '* * * subject to taxes for the year 1947 and thereafter, encumbrances of record, and an Oil and Gas Lease to The Ohio Oil Company in which grantor reserves to herself all cash yearly lease payments to be made in the future under said lease, and reserving to herself one-half of all gas, oil and mineral rights on the premises here passed.' (Emphasis supplied.) This deed was recorded on March 17, 1947 and the oil and gas lease was recorded on April 16, 1947.

On April 26, 1947 Cecil Nicholson and Frederick W. Segelke, another defendant in the trial court, entered into a contract to exchange properties and on May 1, 1947 Cecil Nicholson conveyed to Frederick W. Segelke by warranty deed 120 acres of the land which he in turn had purchased from his sister, Bessie Kilmer. This deed provided, inter alia, that the property was conveyed '* * * excepting one-half of all gas, oil and mineral rights reserved to one Bessie Kilmer in that certain deed recorded in Book 359 at page 373 in the office of the County Clerk and Recorder of Logan County, Colorado, with all its appurtenances, and warrant the title to the same, subject to an Oil and Gas Lease dated April 18, 1944, recorded in Book 363 at Page 188 in the office of the County Clerk and Recorder of Logan County, subject to general taxes for 1947, payable in 1948, and subject to any legal reservations contained in the deed of Bessie Kilmer to grantor herein, dated March 6, 1947, and recorded in Book 359 at page 373 aforesaid.'

In 1950 oil was discovered in producing quantities on that part of the original 326 acres which had been retained by Bessie Kilmer and thereafter from 1950 to 1956 The Ohio Oil Company, or its assignee, te Trigood Oil Company, paid the entire one-eighth royalty to Bessie Kilmer and her assignees. However, on or about November 1, 1955 the Pure Oil Company began purchasing the oil produced on Bessie Kilmer's property and after its attorney had examined the Oil and Gas Lease and the two warranty deeds here involved, it stopped all royalty payments inasmuch as it appeared that Nicholson and Segelke were entitled to a pro-rata share of the one-eighth royalty. Whereupon Bessie Kilmer brought this action seeking reformation of the two warranty deeds referred to supra, and more specifically requesting that each deed be 'reformed to provide that the grantee in said warranty deed shall receive the royalty as provided in the Oil and Gas Lease hereinabove described only from the oil and gas produced from the lands specifically described in said warranty deed, notwithstanding the recital in said deed that the conveyance is subject to the described Oil and Gas Lease.'

Upon trial it was established that neither Bessie Kilmer, Cecil Nicholson nor Frederick W. Segelke had any actual knowledge that the Oil and Gas Lease contained an 'entirety' clause until late in 1955, although all knew that the property conveyed by Bessie Kilmer to Nicholson was subject to the lease. It is the theory of Bessie Kilmer when she conveyed 160 of her 326 acres to her brother, it was their mutual intention to in effect negate or nullify the entireties clause in the Oil and Gas Lease, even though neither had any actual knowledge that the lease contained an entireties clause, because each specifically intended that Nicholson should only be entitled to share in the royalty on oil produced on the 160 acre tract acquired by him and that neither intended that Nicholson was to get a prorata share of the royalty on oil produced on the land...