State Ex Rel. Strandberg v. State Board of Land Commissioners , 131 Mont. 65 ( 1957 )

MR. JUSTICE ANGSTMAN:

This action was brought to enjoin defendants from confirming and approving oil and gas leases on four separate tracts of state lands on the basis of a 16 2/3 per cent royalty.

The complaint alleges in substance that there were bids made on the lands calling for 16 2/3 per cent royalty and also bids calling for 12% per cent royalty. There were separate bids on each of the four tracts of land. The bids in the aggregate were as follows: One bid was for a bonus of $39,040 and 16 2/3 per cent royalty, and the other for a bonus of $68,000 and 12% per cent royalty. Thus it will be seen from the allegations of the complaint that the amount bid for a bonus increased as the royalty decreased, and conversely the amount bid as a bonus decreased as the royalty increased.

The court overruled a general demurrer to the complaint. Defendants elected to stand on the demurrer, suffered judgment to be entered against them, and have appealed from the judgment.

Relator, in contending that the leases are improper, relies on R.C.M. 1947, section 81-1704, as amended by chapter 61, Laws of 1951, which provides that in all oil and gas leases granted by the state there shall be reserved in addition to the rental a royalty in the oil and gas produced, and that such “royalty reservation'shall be twelve and one-half per centum (12% %) on gas, and twelve and one-half per centum (12% % ) on that portion of the average production of oil or casing-head gasoline for each producing well not exceeding 3,000 barrels for the calendar month.”

Counsel for defendant board contend that the amendment to section 81-1704, which fixes the royalty at 12% per cent, is unconstitutional. They rely on section 1 of article XVII of the Constitution which, after providing for the disposal of state lands, contains this limitation: “® * * and none of such land, nor any estate or interest therein, shall ever be disposed of except in pursuance of general laws providing for such disposition, nor unless the full market value of the estate or interest disposed of, to be ascertained in such manner as may be provided by law, be paid or safely secured to the state.”

And counsel for the board contended that the vice of chapter 61 was accentuated by the passage of chapter 122, Laws of 1953, which authorized leases for as long as oil and gas were produced in paying quantities. Leases executed prior to the passage of chapter 122 were “for a period not exceeding ten (10) years and as long thereafter during the term of twenty (20) years commencing with the date of such lease or leases, as oil or gas of commercial quality and in commercial quantity shall be produced from the land covered thereby.” R.C.M. 1947, section 81-1702, subd. (2), before amendment in 1953. And the royalty reservation, “shall not be less than twelve and one-half percent (12%%) of the whole thereof.” Section 81-1704. And at the expiration of such leases the board was given authority to advertise the land for re-leasing to the highest responsible bidder. Section 81-1715:

There is much discussion in the briefs of counsel as to whether it is the legislature or the Land Board that must determine the method of ascertaining the market value of the state lands, or any interest therein, that is to be disposed of. The answer to this question is found in the Constitution.

Section 1, of article XVII, provides that' the market value of the lands and any “estate or interest therein” upon its disposal shall be “ascertained in such manner as may be provided by law. ’ ’ And while the Land Board has the control of the leasing and sale of the school lands of the state, it must do so “under such regulations and restrictions as may be prescribed by law. ’ ’ Mont. Const, art. XI, section 4. The Enabling Act contains practically the same language. The words ‘ ‘ as may be prescribed by law” means as may be provided by the Legislature. State ex rel. Wilson v. Weir, 106 Mont. 526, 79 Pac. (2d) 305, 308.

Thus it is seen that under our Constitution it is the Legislature and not the Land Board that must fix the rules governing the sale and leasing of state land, and the method of arriving at the market value thereof.

There is no merit in the contention that under existing laws the full market value of the lands is not being obtained.

Before the passage of chapter 61, and ever since then, until the instant case arose, leases had been executed with a royalty reservation of 12% per cent, and at the time of receiving the bids on the lands here involved other lands were offered for sale or lease on a royalty of 12% per cent, and sales or leases were made on that basis. If the full market value was obtained for leases carrying a 12% per cent royalty and running for a maximum of twenty years, then it is difficult to understand why at the end of the twenty-year period the market value automatically increases. In other words, the duration of the lease does not appear to have any relationship to the question of what royalty should be obtained in order to receive the full market value of the land.

As before noted, the bid carrying the royalty of 16 2/3 per cent submitted a bonus of only $39,040, whereas the one carrying a royalty of 12% per cent submitted a bonus of $68,000. Which is the highest and best bid? No one can say for sure which is the highest bid in advance of drilling to ascertain whether the land has oil-bearing sands. It should be noted that eight wells out of nine, drilled for oil on an average throughout the country, are dry holes. Bulletin, American Association of Petroleum Geologists, Yol. 37, No. 6, Table III, page 1193. In the ease of dry holes, whatever bonus is paid is in fact in excess of what develops to have been the actual market value of the estate or interest in the land for oil leasing purposes. If perchance some are sold or leased under the legislative method for less than what turns out to be the market value, the legislature was warranted in concluding that the plan as a whole would procure the market value as an average, and that the bonus from dry holes would offset the shortages, if any, on producing acreages. Of course if the Legislature acts arbitrarily, capriciously, fraudulently or without reason, then the courts might intercede. Chapter 61, which fixed the royalty at'12% per cent, was passed without a single dissenting vote in either house (H. J. 1951, page 163; S. J. 1951, page 347), and chapter 122, Laws of 1953, passed the House by a vote of 57 to 30 (H. J. 1953, page 152), and was passed by the Senate by a vote of 34 to 22 (S. J. 1953, page 340).

There is no basis for charging the Legislature with fraud, or that it had acted arbitrarily or capriciously or without reason in passing either act, and particularly chapter 61 which is the one under attack here. It was faced with a difficult situation. It had the duty of discharging two trusts in disposing of state lands.

The Constitution, as above stated, imposes upon the Legislature the obligation to obtain the full market value not only of the land but of every ‘ ‘ estate or interest therein. ’ ’ When lands are leased on a rental basis there is a disposal of an estate or interest therein within the meaning of section 1, article XVII, of our Constitution. Rider v. Cooney, 94 Mont. 295, 23 Pac. (2d) 261. When oil lands are leased on a royalty basis and a cash bonus, as here, the bonus constitutes rental for an estate or interest in the land. State ex rel. Dickgraber v. Sheridan, 126 Mont. 447, 254 Pac. (2d) 390. Hence, the Legislature in leasing oil lands is under obligation to obtain the full market value of the estate or interest disposed of on a rental basis, as well as for the sale of the land itself, or the oil and gas in and under the land. There can be no sacrifice of the rental for additional royalty without, at the same time, violating section 1, of article XVII, as to the interest disposed of by renting.

Paced with this dilemma, the Legislature fixed 12% per cent royalty as the value of the estate or interest sold, when the production does not exceed 3,000 barrels per month, and allowed the estate or interest leased on a rental or bonus basis to be made the subject of competitive bidding. When the Legislature fixed the 12% per cent royalty, which was, and for many years had been, the prevailing rate throughout Montana, and which was also the rate used by the Federal Government and by individuals and corporations generally, there can be no valid contention that it acted arbitrarily, fraudulently, capriciously or without reason or judgment.

We are not at liberty to strike down a legislative enactment simply because we think we might draft a better one. Likewise, if the legislative plan be faulty, the alternative plan proposed as a substitute would not correct the evil, even though we assume that the Board has authority to substitute a plan of its own, which it has not. At most it might be less objectionable, but it too would be faulty in some degree if the legislative plan be held to be so.

In other words, if 12% per cent royalty as a maximum is illegal or unlawful, then so is 16 2/3 per cent, but, except for the difference in percentages of royalty to a lesser degree. If the contention of counsel for defendants be sound, then the only way to assure “market value” would be to have competitive bidding on the percentage of royalty without any bonus. But that plan would have its faults because under such a plan the state never would have had the $5,790,423.32 to distribute to the public schools involved in the case of State ex rel. Dickgraber v. Sheridan, supra, and the Constitution requiring full market value of the estate or interest disposed of on a rental or bonus basis would be violated. Of course if the law does not provide for obtaining the full market value of the lands then the good faith of the Legislature is a matter of no concern, but here it has not been shown that the legislative plan fails to obtain the full market value of the state lands sold or leased for oil and gas purposes.

There is no hard and fast rule that can be devised to obtain the full market value of lands for oil and gas purposes to the exclusion of all others.

Some discretion must necessarily be lodged in the Legislature in fixing the method of determining full market value, and if, and when, it determines by experience that one method is better than another it may in its discretion make a change. In other words, by holding that the present method obtains the fnll market value of the lands, it is not to be understood that it is the exclusive method. This result necessarily follows from the speculative value of any given tract of land being disposed of for oil and gas purposes where no one knows for sure in advance of drilling whether the land has oil bearing sands or, if so, what amount of production can be expected.

The court was right in overruling the demurrer and in entering judgment for relator.

The judgment is affirmed.

MR. CHIEF JUSTICE HARRISON, and MR. JUSTICE CASTLES, concur.