Wigington v. The Mid-Continent Royalty Company

• Decision Date: 07 June 1930
• Docket Number: 29,355
• Citation: 288 P. 749,130 Kan. 785
• Parties: SARAH E. WIGINGTON, Appellee, v. THE MID-CONTINENT ROYALTY COMPANY, FULTON GRAHAM, as President, and EARL A. CLINE, as Secretary, etc., Appellants
• Court: Kansas Supreme Court

288 P. 749

130 Kan. 785

SARAH E. WIGINGTON, Appellee, v. THE MID-CONTINENT ROYALTY COMPANY, FULTON GRAHAM, as President, and EARL A. CLINE, as Secretary, etc., Appellants

No. 29,355

Supreme Court of Kansas

June 7, 1930

Decided January, 1930.

Appeal from Cowley district court; OLIVER P. FULLER, judge.

Judgment affirmed.

SYLLABUS

SYLLABUS BY THE COURT.

1. STATUTES--Construction--Blue-sky Law. The statutes (R. S. 17-1201 to 17-1222, inclusive), known as the blue-sky law, being designed to prevent fraud, are to be liberally construed when they operate against the offense sought to be prohibited.

2. LICENSE--Speculative Securities--Exchange as Constituting Sale. Where a common-law trust exchanges its capital units or shares for a conveyance of an oil-and-gas royalty the transaction constitutes a sale within the meaning of R. S. 17-1202, since the party making the conveyance parts with title to that which is conveyed for a consideration. Where such a transaction takes place without any previous compliance with the blue-sky law by a common-law trust it is void, and the party making the conveyance may rescind and recover the interest conveyed and quiet title against the common-law trust.

3. BUSINESS TRUSTS--Unlawful Exchange of Units--Attorney Fees. In an action to set aside a transaction made in violation of R. S. 17-1202 it is error to allow an attorney's fee to the plaintiff.

William S. Cline and William H. Cline, both of Newkirk, Okla., for the appellants.

W. L. Cunningham, D. Arthur Walker, Fred G. Leach and William E. Cunningham, all of Arkansas City, for the appellee.

OPINION

JOCHEMS, J.:

Plaintiff brought this action to cancel a certain oil-and-gas royalty conveyance on eighty acres of land and to quiet her title to the land. Judgment was rendered for plaintiff, and defendants appeal.

The case was submitted to the court upon the petition of the plaintiff and the exhibits attached thereto, the answer of the defendants, reply of plaintiff, the trust agreement under which the defendant company was organized, and a statement showing a list of the royalties owned by the defendant company which have been acquired by giving in exchange therefor units of ownership in the royalty company. No evidence other than the foregoing was introduced.

The petition of the plaintiff, after alleging that the defendant company was a common-law trust, that defendants Graham and Cline were the president and secretary thereof, respectively, and the address of the defendants at Newkirk, Okla., alleged further that the defendant company had ever since August 17, 1925, been exercising or purporting to exercise corporate powers in the state of Kansas and selling and disposing of units or shares of the defendant company; that the company never at any time had any authority to exercise corporate powers and never had any authority from the Kansas blue-sky board to sell or dispose of units, interests or shares; that the plaintiff is the owner of eighty acres of land (describing), and that in February, 1926, the defendants Graham and Cline came to plaintiff's residence on the lands described in her petition and proposed that she give to the company a royalty pooling agreement and royalty conveyance, conveying to the Mid-Continent Royalty Company, its successors and assigns, an undivided one-half interest in and to the oil-and-gas royalty, exclusive of oil-and-gas lease bonuses and rental moneys on the lands; that they represented to her that the contract and royalty conveyance would be for a term of twenty years and no longer; that the company owned other royalty contracts upon lands on which drilling operations were being conducted, and that within a few months she would be drawing large dividends from the units in the company. The plaintiff alleged that she was illiterate and that defendants knew she could neither read nor write; that defendants further represented to her that the company was duly authorized to transact business in the state of Kansas and that its method of doing business had been submitted to and approved by the blue-sky board of Kansas; that the company had been duly authorized to issue units or shares therein and that in consideration of the foregoing the plaintiff entered into a royalty pooling agreement and made a royalty conveyance in return for a certificate of 2,240 units in the defendant company; that thereafter, on about June 10, 1927, she learned that the royalty pooling agreement and conveyance covering her real estate provided for a term of not only twenty-one years, but for as long as oil and gas were thereafter produced in paying quantities. She learned, also, that the company was not a corporation and had no authority to do business in the state of Kansas; that the company is what is known as a common-law trust under which all unit holders are individually liable for the debts of the company, and learned further that the company had never obtained permission from the blue-sky board of Kansas to sell its units or interests. She learned, also, that the company had no production on any acreage owned by it and no drilling wells on any of its acreage; that immediately upon learning such facts she demanded a reconveyance to her of the royalty and offered to return the units which she had received, and in her petition tendered the units into court. Attached to plaintiff's petition as exhibit A was a copy of the certificate for the 2,240 units of the capital of the defendant company; also attached as exhibit B was the contract and royalty agreement. This was dated February , 1926, and was made between the Mid-Continent Royalty Company, parties of the first part, and Sarah E. Wigington, party of the second part. Exhibit C, attached to the petition, was a copy of the royalty conveyance, which was dated November 14, 1925, and conveyed to the defendant company, its successors and assigns, an undivided one-half interest in and to the oil and gas royalties, exclusive of lease bonuses or rental money on the eighty acres of land described in the conveyance. This conveyance recited that the party of the first part "in consideration of the sum of one dollar and other valuable considerations, receipt of which is hereby acknowledged, does hereby bargain, sell, grant, convey, transfer, assign and set over to the said second party" the interest above described. The term was specified "for a term of twenty-one years and as long thereafter as oil and gas or either of them is produced in paying quantities on any of the acreages in the block belonging to the Mid-Continent Royalty Company." It provided further that the first party should receive all oil and gas bonuses and rentals other than the royalty conveyed, and that in leasing the land the second party should not be a necessary party to the lease. The conveyance also contained a warranty of title on the part of the first party.

In their answer the defendants pleaded a general denial; admitted that the company was a common-law trust, that the defendant Graham was the president and the defendant Cline was the secretary of the company; that the company did pool an undivided one-half interest in the oil-and-gas royalty in the land described in plaintiff's petition and gave the plaintiff 2,240 units in the company in return for the pooling of the royalty; that the royalty conveyance was duly recorded in Cowley county. Defendants denied that there was any fraud or misrepresentation and alleged that plaintiff fully understood the terms of the royalty. They further denied that the "pooling of royalty" in the defendant company and the giving of units in return for the "pooling" come under the blue-sky law of the state of Kansas, and denied that defendants had violated the blue-sky law of Kansas by engaging in the sale of units in the defendant company. To this answer the plaintiff filed a reply, which is a general denial.

On June 13, 1929, the case came on for trial before the court and was taken under advisement to allow plaintiff and the defendants time to file written briefs. At the trial, in addition to the pleadings and exhibits hereinbefore referred to, there was introduced in evidence a copy of the trust agreement under which the Mid-Continent Royalty Company was organized. This trust agreement was drawn in the manner and form of what is generally referred to as a "common law" or "Massachusetts trust." It provided, in part, that the parties Graham and Cline entered into an agreement between them and together with their assigns and successors under which they became the trustees of the trust and had the full right and power to manage and control the same; it further provided that the pool should consist of royalties equivalent to an undivided one-half royalty interest in 50,000 acres of land, and there should be issued in the aggregate for such interests on the 50,000 acres of land two million units to the persons conveying their royalty interests. It further provided a method by which some bank or banks should be appointed as custodians for all funds received as royalties from the interests in oil-and-gas lands belonging to the pool, and that from time to time the banks should distribute to the unit holders their pro rata share of the income from the pool. It provided, also, that of the two million units to be issued, seventy per cent was to be issued to the owners of the lands on which the royalty interests were acquired and thirty per cent of the units was "to go to the trustees for the uniting of the fee holders, and it is further agreed that the trustees are to pay all the expenses of uniting the fee holders of the 50,000 acres." The trust agreement contained further conditions relative to the powers of the trustees to select officers, to fill vacancies on the...