Rees v. Briscoe , 315 P.2d 758 ( 1957 )

HALLEY, Justice.

This is an action by Kenneth W. Rees and Earl Rodkey against Powel Briscoe, E. F. Briscoe and Powel Briscoe, Inc., to establish by constructive trust an overriding royalty interest in the working interest of defendants in a producing oil and gas lease. The parties will be referred to by name or as plaintiffs and defendants as they appeared in the trial court.

We shall set out a summary of the facts which appear to have a bearing upon the issues involved and tend to explain the relationship existing between the parties at the time the transactions here involved occurred.

In 1949 the plaintiff Rees owned oil and gas leases covering the East Half of the Northwest Quarter and the West Half of the Northeast Quarter of Section 28-15N-4W in Logan County, Oklahoma. The two eighty-acre tracts above described will be referred to as the Brouchoud tract and were covered by the same leases. The East Half of the Northeast quarter will be referred to as the Perry tract, on which Rees owned three leases covering 7%o of this tract.

November 23, 1949, Rees assigned his leases covering the two Brouchoud eighty-acre tracts to Powel Briscoe, Inc., reserving ⅛⅛ of %th overriding royalty, to be effective after Powel Briscoe, Inc. had received the sum of $65,000 from production of his share, when Rees was to receive ¾6 overriding interest, to be delivered free of cost to him at the mouth of the well.

On the same date the above assignment was made, Powel Briscoe, Inc. executed an agreement in writing whereby it was agreed that upon approval of title to the leases it would move on the property and commence drilling operations on or before January 1, 1950, and drill to the Bartles-ville sand at approximately 6,500, unless production was found at a lesser depth. This well was completed as a producer in January, 1950.

The leases owned by Rees, covering 7%o of the minerals in the Perry tract, the East Half of the Northeast Quarter, were for a primary term of one year, or as long as there was production. On December 21, 1949, Rees assigned his leases covering 7%o of the Perry tract to Powel Briscoe, Inc., by an ordinary assignment, reserving an override of ⅛ of ⅞ working interest. The Brouchoud Well No. 1 was then being drilled. The only consideration for this assignment was the reserved override.

Rees testified that he transferred his leases on the Perry tract for no consideration except the reserved override because Briscoe had agreed to drill one well on each of the three eighty-acre tracts above described; that after the Brouchoud Well No. 1 was completed, he would drill on the other Brouchoud tract and then drill the third well on the Perry tract which adjoined the Brouchoud tract on the east. Briscoe denied that he made this agreement. The assignment of the leases on the Perry tract made no mention that the reserved override would apply to any renewal or extension leases. The leases were for only one year and provided for no rental payments to extend the time for drilling. They expired in September, November and December, 1950.

Rees further testified that soon after the completion of the Brouchoud No. 1, defendants announced that they had to drill a well in Caddo County, but would then return and finish another well on the Brou-choud tract and one on the Perry tract. They drilled no further wells in that area in 1950.

Plowever, about a month prior to the expiration of the Perry leases Briscoe obtained at his own expense, renewals of two of the leases on this land and by 1953 secured leases covering all of the minerals in the Perry land. The new leases made no mention of the Rees overriding royalty. Rees heard that new leases were being obtained by Briscoe but said he relied upon defendants to preserve and recognize his override.

On May 19, 1953, plaintiffs requested defendants give them a recordable instrument recognizing their overriding interest in the Perry tract. This was refused and plaintiffs commenced this action which resulted in a judgment for defendants and plaintiffs have appealed.

Almost immediately after the above demand by plaintiffs the defendants executed and filed for record releases of the three leases on the Perry tract assigned to Briscoe. The leases so released, and assigned by Rees tO' Briscoe each reserved to Rees a ⅛ of ⅞ overriding royalty. The leases so assigned had expired but Briscoe had secured new or extension leases and had obtained commercial production on the Perry tract, but had made no recognition of the Rees override.

Plaintiffs allege that since two of the leases assigned by Rees to Briscoe had not expired when Briscoe secured new leases, these new leases should be considered as extensions of the leases assigned, resulting in' the creation of an equitable trust in favor of plaintiffs to the extent of their interest.

The evidence clearly discloses that defendants have fully recognized and followed the terms of the assignment by plaintiffs of the Brouchoud leases whereby plaintiffs reserved an overriding royalty of Ys of ⅞ until defendants had received from their interest the sum of $65,000, when the override was increased to ¾6 of %. This fact is only important in that it doubtless had some bearing upon the confidence reposed by plaintiffs in the defendants. It naturally caused plaintiffs to believe that the override on the Perry tract would be recognized and scrupulously followed by defendants.

Since the defendants appear to have carried out their agreement to drill the Brou-choud well No. 1, completing it in January, 1950, the plaintiffs naturally reposed confidence in them and relied upon their asserted oral agreement to drill three wells, two on the Brouchoud tract and one on the Perry tract unless dry holes were encountered. Rees testified he had confidence in Briscoe and assumed and believed that when he heard that Briscoe was securing new leases, he felt certain and assumed that his override was and would be protected.

We find it difficult to believe that Rees did not have full confidence in Briscoe when he transferred the leases on the Perry tract for no monetary consideration, but in reliance upon Briscoe to develop the Perry tract. The long delay from 1950, when the Perry leases expired, to 1953, when Rees demanded that his interest be recognized, indicates that Rees believed that Briscoe would protect his interest. Judging by the time required to complete the Brouchoud No. 1, the second well on that tract and a well on the Perry tract could have been at least commenced before the expiration of the assigned leases.

The lessor, Knightlinger, who owned 8%o of the minerals in the Perry tract, offered a new lease to Rees, when Briscoe’s agent approached her for a new lease, but Rees declined and permitted Briscoe to acquire a new lease. A producer had been drilled on the Perry tract before Rees knew that his override would not be recognized and protected by Briscoe.

It is not disputed that the assignments of the leases on the Perry tract contained no express agreement to drill and neither was there any agreement in writing as to the drilling of a well as there was in respect to the Brouchoud leases. It is not shown why Rees did not request or require a written agreement as to the Perry tract leases. This fact is but another proof of the confidence of Rees in Briscoe. The assignment by Rees of the Perry leases contains the following reservation to-wit:

“ * * * reserving, however, unto Kenneth W. Rees a ⅛⅛ of %tb. of all oil and gas that may be produced under the above described land during the term of said leases, same to be delivered at the mouth of the well, free of cost to the assignor.”

It is evident that it would have been easy to have added a few words to the effect that the reservation should apply to renewals or extensions of the leases assigned. That would have protected the assignor from what happened when Briscoe secured new leases and refused to recognize the interest of Rees who gave up his leases for no consideration whatever when Briscoe failed to develop but secured new leases. He only released the leases assigned to him by Rees after Rees demanded that his interest be recognized. No business man would donate his leases to another under such circumstances unless he had confidence in his assignee.

Plaintiffs rely principally upon two former decisions of this Court. They are Probst v. Hughes, 143 Okl. 11, 286 P. 875, 69 A.L.R. 929 and Hivick v. Urschel, 171 Okl. 17, 40 P.2d 1077.

In the Probst case the assignment expressly provided that the overriding interest reserved by the assignor should extend to all “modifications, renewals or extensions” of the lease that assignee might secure. However, the Court held that the assignee owed a duty to the assignor to protect his interest, and said in part as follows:

“In these circumstances, therefore, we think, as is contended by plaintiff, that the case is brought within the oft-repeated rule found in many cases and standard legal treatises which is admirably expressed in Trice v. Comstock, 8 Cir., 121 F. 620, 57 C.C.A. 646, 61 L.R.A. 176, to wit:

“ ‘Wherever one person is placed in such a relation to another by the act or consent of that other, or by the act of a third person, or of the law, that he becomes interested for him, or interested with him, in any subject of property or business, he is in such a fiduciary relation with him that he is prohibited from acquiring rights in that subject antagonistic to the person with whose interests he has become associated.’” [143 Okl. 11, 286 P. 877.]

The Court also quoted from Clements v. Cates, 49 Ark. 242, 4 S.W. 776, 777, where it is said:

“The law forbids a trustee, and all other persons occupying a fiduciary or quasi fiduciary position, from taking any personal advantage touching the thing or subject as to which such fiduciary position exists; or, as expressed by another: ‘Wherever one person is placed in such relation to another, by the act or consent of that other, or the act of a third person, or of the law, that he becomes interested for him, or interested with him, in any subject of property or business, he is prohibited from acquiring rights in that subject antagonistic to the person with whose interest he has become associated.’ If such a person acquires an interest in property as to which such a relation exists, he holds it as a trustee for the benefit of those in whose interest he was prohibited from purchasing, to the extent of the prohibition.”

In the later case of Hivick v. Urschel, supra, the oil and gas lease involved was owned by Hivick and was assigned by him to T. B. Slick for a consideration of $49,-800, $5,000, of which was paid in cash and $44,800 was to be paid from one-half of the oil produced. The assignee agreed to commence a well within sixty days. If the first well was a dry hole, assignee agreed to pay the rentals and protect the lease at his option, but paying assignor one-half of the oil produced from any well until the balance on the purchase price was paid.

The contract also provided that the as-signee might release the lease, but before doing so he was to give assignor thirty days notice in writing of such intention, whereupon within thirty days assignor could request that the lease be reassigned to him. The notice provided for was not given. Slick failed to file his release within ninety days prior to the expiration of the lease as required by the rules of the Indian Agency, but the lease expired by its own terms July 29, 1926. On July 30, 1926, Slick secured a new lease from the land owner, and assigned an interest therein to Prairie Oil and Gas Company, which obtained production. Slick died and the plaintiff’s claim was denied, and this action was filed on the rejected claim. The Court held that plaintiff was entitled to recover the amount agreed to be paid him from production.

The doctrine of constructive trusts was invoked and the Court quoted extensively from 3 Pomeroy’s Equity Jurisprudence (4th Ed.) p. 2392, § 1050, in paid as follows:

“* * * The doctrine is not confined to partners; it extends in all its breadth and with all its effects to trustees, guardians, and all other persons clothed with a fiduciary character, who are in possession of premises as tenants on behalf of their beneficiaries, or who are in possession as tenants of premises in which their beneficiaries are interested. As this rule results from the relation of trust and -confidence existing between the partners or other persons interested, it might be regarded as an outgrowth of the doctrine formulated in the preceding paragraph. It is more directly, fiowever, a particular application of a broad principle of equity, extending to all actual and quasi trustees, that a trustee, or person clothed with a fiduciary character, shall not be permitted to use his position or functions so as to obtain for himself any advantage or profit inconsistent with his supreme duty to his beneficiary.”

The Court held that under the circumstances and facts the plaintiff was entitled to recover the balance due him from production under the new lease obtained by Slick after the expiration of the original lease upon the theory that the parties stood in a fiduciary relationship which would make it unfair and inequitable to allow the acquisition of a new lease and thus deprive the assignor of his reserved interest as retained in his assignment.

In the case under consideration Rees received no consideration in cash or otherwise for his lease, except the reserved overriding royalty, which was dependent upon production. It is unreasonable to assume that Rees would assign his lease for no present consideration unless he felt that he could depend upon Briscoe to undertake the development of the lease.

The defendants rely largely upon Kile v. Amerada Petroleum Corp., 118 Okl. 176, 247 P. 681. That was an action for damages for breach of contract. Amerada had taken an assignment of an oil and gas lease covering twenty acres of land in Payne County. The assignment reserved a l4th overriding royalty to assignor. It was alleged that Amerada drilled wells on land adjacent to the twenty acre tract and drained the oil therefrom to plaintiff’s damage as above stated.

The court examined the assignment and found that it contained no obligation on the part of the assignee to develop for oil and gas and that such obligation could not be implied, but must be found in the contract of assignment. A demurrer to plaintiff’s petition was sustained. This decision was rendered in 1925 and has been cited in Patsy Oil & Gas Co. v. Baker, 127 Okl. 76, 259 P. 864, which is not in point here, and in Phoenix Oil Co. v. Mid-Continent Pet Corp., 177 Okl. 530, 60 P.2d 1054, 1060, 111 A.L.R. 504. In the last case mentioned the lessee had an option to pay rentals and had paid $15,000 cash for the assignment, which also provided for an additional $15,000 from oil produced. In the opinion it is said:

“* * * The $15,000 bonus stipulated to be paid the first party was not the entire consideration paid for the half interest in the leased premises, but there was a very substantial cash payment made at the time of the execution of the assignment besides the rental payments made by the second party from time to time in lieu of drilling.”

Many other cases are cited by defendants but the facts are materially different from those before us in the case being considered. In several of the cases cited the assignments reserving overriding royalty as part of the consideration for the assignment was paid at the time the transfer took place. Most of the cases relied upon by defendants involved no confidential relationships between the parties.

We think the dealings between Briscoe and Rees with respect to the Brouchoud leases and the fact that Briscoe had and was continuing to perform his part of his agreements with Rees have an important bearing upon the confidential relationship existing between these parties when Rees assigned his leases on the Perry tract with no mention of the fact that an override res'erved was to apply to renewals or extensions of such leases. There is no evidence contrary to that of Rees as to his confidence in Briscoe and his associates. Had he doubted Briscoe he would no doubt have seen that such provisions were included in his assignments.

Again, under the contentions of defendants, Rees gave up his leases on the Perry land for no consideration whatever and must have believed that Briscoe would protect his interest. We conclude that the judgment of the trial court is against the clear weight of the evidence.

We find no merit in defendants’ plea of limitations. It was 1953 that the plaintiff first learned that his overriding royalty interest would not be recognized by Bris-coe. The leases reserving his interest were of record until 1953. It is also contended that the alleged oral agreement of Briscoe to drill upon the Perry tract after drilling two wells upon the Brouchoud tract was in violation of Section 137, 15 O.S.1951, dealing with the alteration of a written contract. It should be remembered that there was no written contract between the parties as to drilling or development — only a written transfer of the leases, and the oral agreement to develop covered a matter not mentioned in the transfer.

The judgment is reversed with directions to render judgment for Rees as prayed for, establishing his overriding royalty in 7%oth of the Perry tract and an accounting for his interest in production to date and judgment for such sum with interest from date received by Briscoe.

WELCH, C. J., CORN, V. C. J., and JOHNSON, BLACKBIRD and CAR-LILE, JJ., concur. WILLIAMS, DAVISON, and JACKSON, JJ., dissent.