Swiss Oil Corp. v. Hupp

• Decision Date: 23 March 1934
• Citation: 69 S.W.2d 1037,253 Ky. 552
• Parties: SWISS OIL CORPORATION et al. v. HUPP et al.
• Court: Kentucky Court of Appeals

69 S.W.2d 1037

253 Ky. 552

SWISS OIL CORPORATION et al. v. HUPP et al.

Court of Appeals of Kentucky

March 23, 1934

Appeal from Circuit Court, Johnson County.

Action by the Swiss Oil Corporation and another against W. E. Hupp and others. From the judgment, plaintiffs appeal, and defendants cross-appeal.

Reversed in part, and affirmed in part.

REES C.J., and DIETZMAN and PERRY, JJ., dissenting in part.

E. L McDonald, of Lexington, and D. L. Hazelrigg, of Frankfort for appellants.

S. S. Willis, of Ashland, and E. C. O'Rear, of Frankfort, for appellees.

STANLEY Commissioner.

In Swiss Oil Corporation v. Hupp, 232 Ky. 274, 22 S.W.2d 1029, it was decided that the oil and gas lease made in 1916 by W. L. Gillem to one Albin, coming by conveyance to the Union Gas & Oil Company, thence to the Swiss Oil Corporation, should prevail over a top lease to Hupp and associates made in 1921. The case was remanded for an accounting or the adjudication of damages arising from the trespass and extraction of oil by the appellees. During the period of operation Hupp and associates recovered and sold 67,527 barrels of oil for $142,849.28. The trial court adjudged this sum to the Swiss Oil Corporation and the Union Gas & Oil Company, less the cost of production, fixed at $60,148.88, thereby awarding a judgment for $82,700.40, with interest from the date of its entry. All parties appeal from that judgment. The Swiss Oil Corporation and the Union Gas & Oil Company take the position that they are entitled to the gross receipts of $142,849.28, with interest from the dates the various collections were made, which would be about $70,000 up to this time. Hupp and associates are contending that the proper criterion of damages is the usual and customary royalty of one-eighth of the value of the oil produced, or that they have the right to satisfy their obligation by restoring 67,527 barrels of oil which they have offered and are prepared to deliver within a reasonable time. They likewise claim the right to a credit for the enhancement in value of the property by reason of the permanent improvements. Other issues with respect to the correctness of the amounts of the charges and credits under the measure of damages fixed by the court will appear in the course of the opinion. For brevity the Swiss Oil Corporation and the Union Gas & Oil Company, which preceded it, will be referred to as the oil company, or as appellants, and Hupp and those associated with him will be referred to as Hupp or as the appellees, for there is a unity of interest among the parties on the two sides of the case, respectively.

1. The prime problem is to determine the quality of the appellees' acts in entering upon the property and extracting the oil. That they were trespassers is no longer in doubt. Their classification as willful or as innocent trespassers, as commonly called, is the hinge upon which the case hangs and upon which the decision as to the extent of recovery must turn. In the approach to the consideration of the evidence, we may suggest the abstract distinction between a willful and an innocent trespasser met with in the opinions dealing with this character of cases, namely, the one knows he is wrong and the other believes he is right. The degree of culpability as between the two determines the extent of liability. The former class of wrongdoers find the way of the transgressor hard under the law. They are held to a strict accountability for their malappropriation of another's property. Complete restitution without credit for expenses incurred or deduction of costs of production is required. But those who invade the property of another inadvertently or under a bona fide belief or claim of right and extract minerals are allowed credit for proper expenditures in obtaining or producing them. While not allowed any profit, they are not to be penalized. See Bozeman Mortuary Association v. Fairchild, 253 Ky. 74, 68 S.W.2d 756.

In February, 1916, W. L. Gillem executed an oil and gas lease on his 50-acre tract in consideration of $1 and the promise to pay 10 cents an acre per year for 10 years, unless developed. The Union Gas & Oil Company at that time acquired leases on about 17,000 acres, which comprised nearly all the farms in the district. About 1917 or 1918 it discovered that this was a productive field. The company claims that it was drilling and developing its various leases as rapidly as possible, but that Hupp came into the field and made some of the lessors dissatisfied. On the other hand, Gillem has claimed that the company was neglectful of him and was refusing to drill upon his land, being satisfied to pay the $5 annual rental. At any rate, in February, 1920, Gillem served notice upon the company to develop his property promptly, and, unless that was done, he would bring suit for cancellation of the lease. The company proclaimed, according to Gillem, that those who had given notice would be the last to have their property drilled.

In May, 1921, or 15 months after the demand had been made, Hupp was informed by Gillem of the situation. He also learned then that the oil company was contending it did not have to drill as long as it paid the rentals and that it had the right to the position it was taking under that lease. In that month the oil company began a well about a quarter of a mile from Gillem, which was the closest point it had commenced to develop. It already had a number of producing wells a little farther away. At this time Gillem agreed to lease his land to Hupp, declaring that he would treat the oil company's lease as abrogated. Hupp and Gillem were advised by a firm of reputable local lawyers that in their opinion the oil company's lease had been forfeited, and that Gillem had the legal right to disregard it and to execute an exclusive lease to another. About the same time Hupp submitted to a distinguished attorney in Frankfort, a former member of this court, copies of the oil company's lease and the notice which had been given it to develop, together with a statement of the foregoing facts. After an investigation of the authorities, this attorney gave an opinion that the former lease had been forfeited and that Gillem was free to execute a lease to Hupp. Thereupon, acting upon the facts and the legal advice thus obtained, Gillem executed a lease to Hupp on May 18, 1921, for which he was paid $1,350 as part consideration. A separate contract was also signed with the respect to payment of further consideration upon a judicial determination as to the validity of the respective leases. This contract will be referred to later.

A few days thereafter Gillem brought suit in the United States District Court against the oil company to have its lease adjudged to be forfeited. Two months after the Hupp lease had been given and this suit was filed, the oil company, over Gillem's protest, moved a rig on the premises and began drilling. A well was brought in, and by December, 1921, the company had a second well. No others were ever drilled by it. The suit in the federal court was not pressed and was dismissed without prejudice on May 3, 1922. A few days later suit was brought in the state court by Gillem against the oil company's employees to enjoin them from trespassing upon his land. But no temporary restraining order was applied for. About the time that suit was filed Hupp went upon the land and also began operations. It is stipulated that Hupp would testify he believed that he had the right to develop this property, and that he proceeded to do so in reliance upon the advice of counsel, and that he continued his development on account of the delays encountered in the courts and because of the progress of the development in that field. The trial court enjoined the oil company's employees, and held that its lease was void. A few months later that judgment was modified by striking all reference to the oil company, since it was not a party to the suit, and the case was dismissed by agreement. After a time, the case was brought to this court by Gillem, but the appeal was dismissed on November 13, 1925, on the ground that the agreement had put an end to the litigation. Shannon v. Gillem, 211 Ky. 217, 277 S.W. 244.

Within a short while after the filing of that suit, this action was begun on June 13, 1922, by the oil company against Gillem and others, seeking the cancellation of the Hupp lease and asking that its title be quieted. No temporary injunction was sought. The defendants pleaded the invalidity and abandonment of the oil company's lease and set up the lease to Hupp and asked that it be adjudged to prevail. The trial court (with a different judge from that which decided the suit against the employees) held in this case also that the senior lease had been forfeited and that Hupp's junior lease was good. An appeal was prosecuted, but the judgment was not superseded. That judgment was reversed in Union Gas & Oil Company v. Gillem, 212 Ky. 293, 279 S.W. 626, because Moore and Swope, who had acquired interests in the oil rights from Gillem, were necessary parties and had not been brought before the court. But it was declared in the opinion that the oil company had not begun development within a reasonable time after the notice given it by Gillem, and that, had he remained as the sole lessor and not sold his interest to Moore and Swope, "it cannot be doubted that he would have been entitled to declare a forfeiture." Two other cases were referred to involving the same issues between the oil company and W. L. Gillem's brother, George Gillem, and another lessor, in which the same conclusion had been reached by both the trial and this court that the bottom leases had been abandoned. One is Union Gas & Oil Company v. Indian-Tex Petroleum Company, 199 Ky. 384, 251...