Shepard v. John Hancock Mut. Life Ins. Co., 42349

• Decision Date: 20 January 1962
• Docket Number: No. 42349,42349
• Citation: 368 P.2d 19,189 Kan. 125
• Parties: Ethel L. SHEPARD, Executrix of the Estate of M. L. Shepard, Deceased, and Ethel L. Shepard, Appellees, v. The JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a Corporation, Appellant.
• Court: Kansas Supreme Court

Page 19

368 P.2d 19

189 Kan. 125

Ethel L. SHEPARD, Executrix of the Estate of M. L. Shepard Deceased, and Ethel L. Shepard, Appellees, v. The JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a Corporation, Appellant.

No. 42349.

Supreme Court of Kansas.

Jan. 20, 1962.

Rehearing Denied March 7, 1962.

Syllabus by the Court

Under the terms of a reservation of a fractional interest in oil, gas and other mineral rights in 640 contiguous acres of land which defendant sold and conveyed to plaintiffs and upon which production of oil was obtained on one quarter section during the primary term of the reservation and has continued to the present time, no production being obtained elsewhere on the acreage, the terms of which are set out in the opinion and considered, it is held: The defendant is the owner of an undivided 1/4th non-participating interest in the minerals in place in all the land sold and conveyed constituting an estate in real property which was vested in it at the time the deed was delivered, and following Baker v. Hugoton Production Co., 182 Kan. 210, 320 P.2d 772, production of oil on one quarter section of the described land during the primary term perpetuated and extended the defendant's mineral interest as to the remaining three quarter sections, and it is entitled to 1/4th of the production from the entire acreage.

Clayton S. Flood, Hays, and W. F. Schell, Wichita, argued the cause, and George B. Collins, Oliver H. Hughes, Robert Martin, K. W. Pringle, Jr., Thomas M. Burns and Laverne Morin, Wichita, were with them on the briefs, for appellant.

D. A. Hindman, Stockton, argued the cause, and Stanley Krysl, Stockton, was with him on the briefs, for appellees.

FATZER, Justice.

This action was commenced on May 26, 1958, by M. L. Shepard and Ethel L. Shepard, his wife, to quiet title to certain real estate in Rooks County, Kansas, described as the Southeast Quarter (SE 1/4) of Section 14; East half (E 1/2) of Section 23, and the Southwest Quarter (SW 1/4) of Section 24, all in Township Ten (10) South, Range Eighteen (18) West. After the death of M. L. Shepard, the action was revived in the name of Ethel L. Shepard, executrix of the estate of M. L. Shepard, deceased, and Ethel L. Shepard, as plaintiffs. The case was submitted to the district court upon the pleadings, and a written statement of facts which was agreed to. The court's judgment was in part in favor of the plaintiffs and in part in favor of the defendant, as hereafter set forth, and the defendant has appealed.

The pertinent facts are summarized: On March 13, 1940, the defendant, John Hancock Mutual Life Insurance Company, a corporation, owned the real estate involved and on that date it entered into a written contract with M. L. Shepard for the sale of the property. The contract recited, among other things, that the sale was subject to three outstanding oil and gas leases covering all the land dated July 1, 1936, in favor of one A. M. Jennings, each for a primary term of ten years from July 1, 1936, with payment to the lessor of 1/3th royalty of oil and gas produced, and an exception and reservation in favor of the defendant, the exact provisions of which were contained in the deed conveying the property to the plaintiffs.

On July 21, 1942, and pursuant to the contract of sale, the defendant executed and delivered its special warranty deed to plaintiffs conveying the real estate in fee simple subject to the Jennings leases, and also subject to an exception and reservation, hereafter referred to as reservation, in the granting clause, which reads:

'* * * excepting and reserving with right of ingress and egress, an undivided 1/4 of the landowners 1/8 royalty, or, 1/32 of the interest in and to all oil, gas or other minerals (of every character and kind) in or under the said land for a period of fifteen (15) years from April 1, 1940 and as long thereafter as oil, gas or any other mineral, is produced from said land, or operations for any such mineral are being conducted thereon by grantees or grantor (their Successors or assigns). The said royalty reservation shall not be participating in bonuses or rentals, but shall be participating in other rights, royalties and other benefits accruing under any existing or future oil, gas or mineral lease while the said royalty reservation is in full force and effect.'

The deed was acknowledged by the defendant and recorded in Rooks County on April 28, 1943.

On March 29, 1943, plaintiffs executed and delivered to defendant their mortgage in the principal sum of $4,700 covering the real estate conveyed by the special warranty deed, which was recorded in Rooks County on April 28, 1943, the same date the special warranty deed was recorded. The mortgage contained the following recital:

'Subject to the undivided one-fourth nonparticipating mineral interest heretofore reserved to the John Hancock Mutual Life Insurance Company in the deed from the John Hancock Mutual Life Insurance Company to M. L. Shepard and Ethel M. (sic) Shepard dated July 21st, 1942, for a term of 15 years from April 1, 1940, and so long thereafter as any minerals including oil and gas are produced.'

Plaintiffs later executed four other mortgages which did not refer to any reservation, but those mortgages were executed to mortgagees other than the defendant.

The Jennings leases expired or were dropped without oil or gas being produced, and were released of record on a date not disclosed by the record.

The real estate involved is 640 contiguous acres lying in an 'L' shape, being a mile and a half north and south and a mile east and west. On April 29, 1949, plaintiffs leased the northernmost quarter section of the long part of the 'L', the Southeast Quarter of Section 14, to Ajax Oil Company, Inc. for oil and gas development, which lease was duly recorded in Rooks County. The instrument was a standard form commercial lease designated as Form 88 (Producers) B 1-43, and provided for the payment of the usual 1/8th royalty in the event of production. The lease was for a primary term of two years and as long thereafter as oil and gas, or either of them, were produced from the land.

In the early part of 1951 oil was produced under the Ajax lease from a ten-acre location in the extreme northeast corner of the Southeast Quarter of Section 14, and production of oil has been continuous to the present date. No additional production has been obtained under that lease. All oil produced has been delivered to a pipe line and sold to the National Cooperative Refinery Association pursuant to division orders executed by the plaintiffs and defendant on November 5, 1951. The division orders provided that the interest of defendant under the reservation was 1/4th of 1/8th royalty interest and the interest of each of the plaintiffs was 3/8ths of 1/8th royalty interest. Payments for oil purchased have been made and accepted by plaintiffs and defendant on the basis of those fractional interests.

At the expiration of the primary term of the reservation--April 1, 1955--the other three quarter sections here involved--the East Half of Section 23 and the Southwest Quarter of Section 24--were not leased for oil, gas or other minerals and remained unleased until September 9, 1957. On that date the plaintiffs executed separate oil and gas leases on each of the three quarter sections to the Davis Brothers. No oil or gas has been produced under the Davis Brothers' leases. Subsequently, and on March 25, 1958, the plaintiffs and the defendant executed an agreement in writing ratifying oil and gas leases covering all of the land involved, which recognized the defendant as owning an interest in the 1/8th royalty in all of the real estate. The instrument was duly recorded in Rooks County on May 21, 1958.

In a memorandum opinion the district court found that the reservation in question created a royalty interest of 1/4th of the landowners' 1/8th royalty, which was valid and in force and effect as to the Southeast Quarter of Section 14 since production was obtained under the Ajax lease during the primary term of such interest. Accordingly, judgment was rendered that the defendant was the owner of a royalty interest consisting of 1/32nd of the total amount of oil produced from that quarter section so long as oil is continuously produced therefrom. With respect to the other three quarter sections, it found that since the reservation was one of a royalty interest only, such interest vested under the Jennings leases when the conveyance was made on July 21, 1942, and when those leases expired or were dropped there was no vesting; that since the three quarters were not leased for oil and gas on April 1, 1955, the end of the fifteen-year period, and remained unleased for some eighteen months thereafter, the reservation violated the rule against perpetuities as being too remote as to vesting and was therefore void. In other words, the district court concluded that, insofar as the rule against perpetuities is concerned, a term royalty interest stems from and finds its life in an oil and gas lease which must be in existence when the interest is created, or one executed during the primary term of such interest, and has no valid existence otherwise. Conclusions hereafter announced make it unnecessary that we pass upon that question. In harmony with its findings, the district court rendered judgment quieting plaintiffs' title to the East Half of Section 23 and the Southwest Quarter of Section 24 and to the production of oil, gas or other minerals therefrom as against the defendant and all persons claiming through or under it.

The first and paramount question is: What was the nature of the interest reserved? The answer turns largely upon the construction to be given the reservation. The fundamental rule in construing the effect of written instruments is that the intent and purpose of the parties be determined from an examination of the entire instrument, or as is sometimes...