Title: Hunt Trust Estate v. Kiker

State: north-dakota

Issuer: North Dakota Supreme Court

Document:

269 N.W.2d 377 (1978) William Herbert HUNT TRUST ESTATE whose Trustee is Ivan Irwin, Jr., Plaintiffs-Appellants, v. Russell L. KIKER and Target Energies, Inc. (the Defendants John H. Kemp, Comanche Resources Company, H. Richard Aslakson and Sylvia J. Aslakson are severed from this action), Defendants-Appellees. Civ. No. 9448. Supreme Court of North Dakota. July 26, 1978. *378 Fleck, Mather, Strutz & Mayer, Bismarck, for plaintiffs and appellants; argued by Russell R. Mather, Bismarck. John H. MacMaster, Williston, for defendant and appellee Russell L. Kiker. Murray, Olson, Larivee & Bohlman, Grand Forks, for defendant and appellee Target Energies, Inc.; argued by Bruce E. Bohlman, Grand Forks. PAULSON, Justice. This is an appeal by the plaintiff, William Herbert Hunt Trust Estate (hereinafter Hunt), from the judgment of the Dunn County District Court entered on November 14, 1977, in which the court dismissed on its merits and with prejudice Hunt's quiet title action against the defendants Russell L. Kiker (hereinafter Kiker) and Target Energies, Incorporated (hereinafter Target). Hunt's quiet title action involved a quarter section of land (160 acres) in Dunn County owned by Pete and Lillian Glovatsky (hereinafter the Glovatskys) described as the Northwest Quarter of Section 19, Township 145 North, Range 97 West of the Fifth Principal Meridian (this quarter section of land will be hereinafter referred to as the NW ¼ of Section 19). On July 22, 1972, the Glovatskys executed and delivered to Hunt a 10-year oil and gas lease on all of their property, which consists of approximately 640 acres and is situated in both Dunn and McKenzie Counties. Hunt's oil and gas lease included the NW ¼ of Section 19. Hunt recorded the lease in McKenzie County on October 6, 1972, but, through inadvertence or otherwise, did not record the lease in Dunn County until January 14, 1977. The Glovatskys, on December 28, 1976, executed and delivered a mineral deed to John H. Kemp, conveying to him an undivided one-fourth interest in oil and gas and other minerals except "coal and lignite" in the NW ¼ of Section 19. Kemp recorded his deed in Dunn County on December 31, 1976. On January 4, 1977, Kemp leased all of his oil and gas interests in the NW ¼ of Section 19 to Comanche Resources Company. This lease was recorded in Dunn County on January 5, 1977. Thereafter Kemp sold a one-eighth mineral interest to H. Richard Aslakson and Sylvia J. Aslakson. During January of 1977, Kiker became interested in purchasing mineral rights in Dunn County. Kiker retained Marvin L. Kaiser, a Williston attorney, to assist him in finding potential properties for purchasing mineral rights and to perform title searches of such properties. Kaiser prepared for *379 Kiker a list of mineral owners having mineral interests adjacent to an oil well which was being drilled at that time in the area. Kiker commenced to contact some of the mineral owners on the list prepared by Kaiser. Kiker contacted the Glovatskys in person on their farm and expressed his desire to purchase the mineral rights in the NW ¼ of Section 19. He was accompanied by Morris Lassey who was assisting him in negotiations. Both Pete Glovatsky and Kiker testified that Glovatsky told Kiker that the NW ¼ of Section 19 was leased to someone else. They both further testified that Pete Glovatsky showed Kiker and Lassey some delay rental receipts which indicated that the Glovatskys had received annual rental payments of $640.00 from Hunt during 1973, 1974, 1975, and 1976. None of the receipts contained a land description. One of the receipts did contain a notation stating "Lease # 58157". Kiker testified that he did not look at these rental receipts when they were presented to him by Pete Glovatsky. The Glovatskys did not have a copy of the lease they had executed with Hunt and, consequently, they were unable to show Kiker the lease when he questioned them about it. Prior to purchasing any mineral rights from the Glovatskys on the NW ¼ of Section 19, Kiker checked the records in the Dunn County office of the Register of Deeds at Manning, North Dakota. He discovered an oil and gas lease which had been executed from John H. Kemp to Comanche Resources Company. He did not, of course, discover the Hunt lease because it was not recorded in Dunn County at the time. Kiker also requested Kaiser to check the records for the NW ¼ of Section 19 in the Dunn County office of the Register of Deeds. Kaiser did check the records on January 13, 1977. His investigation of such records revealed no lease except that from Kemp to Comanche Resources Company. Kaiser advised Kiker that the Comanche lease would not cover more than the undivided one-fourth mineral interest which the lessor, Kemp, owned on the NW ¼ of Section 19. It is undisputed that Kaiser was not informed by Kiker that Pete Glovatsky had told Kiker the NW ¼ of Section 19 was leased to someone else. It is also undisputed that Kiker did not mention Hunt's name to Kaiser, nor did he tell Kaiser about the rental receipts which the Glovatskys had displayed to Kiker and to Lassey. On January 13, 1977, Kiker purchased from the Glovatskys a mineral deed to an undivided one-eighth interest (more specifically, an undivided 20/161.77 acres) in oil and gas and other minerals in the NW ¼ of Section 19, which deed was recorded on that same day, January 13, 1977. Kiker was aware that Kaiser was the sole shareholder of Target and that, through Kaiser, Target had "put together drilling operations and was capable of doing it". Consequently, on January 13, 1977, Kiker executed an oil and gas lease with Target on the NW ¼ of Section 19, for which Target paid the prevailing lease price of $10.00 per acre. This lease was recorded in Dunn County on the same day, January 13, 1977. On the following day, January 14, 1977, Kaiser suggested to Kiker that he should contact the Glovatskys to determine whether Kiker could obtain an oil and gas lease on the remaining 100 acres of the NW ¼ of Section 19. Kiker promptly contacted Pete Glovatsky by telephone. Glovatsky informed Kiker, once again, that the NW ¼ of Section 19 had been leased and that he could not, therefore, lease the property to anyone else. Kiker then related to Kaiser, for the first time, that Glovatsky had insisted the NW ¼ of Section 19 was leased to someone else. The record is undisputed that Kaiser had not been informed by Kiker, prior to January 14, 1977, that Glovatsky had told Kiker he had leased the NW ¼ of Section 19 to Hunt. During January of 1977 Hunt became aware that its oil and gas lease with the Glovatskys was not filed in Dunn County. Consequently, Hunt filed such lease in Dunn County on January 14, 1977. Hunt commenced an action to quiet title to its oil and gas leasehold on the NW ¼ of Section 19, naming as defendants Kiker, *380 Target, Kemp, Comanche Resources Company, and the Aslaksons. The action against Kiker and Target was severed from the action against the other defendants and a trial was commenced on June 1, 1977, before the court, without a jury, concerning the issues between Hunt, Kiker, and Target. On conclusion of the trial, the court filed its findings of fact, conclusions of law, and order for judgment in which the court determined that Kiker and Target were both bona fide purchasers for value without notice of the prior oil and gas lease executed between Hunt and the Glovatskys on the NW ¼ of Section 19. The court further determined that Kiker's mineral deed and Kaiser's lease on the NW ¼ of Section 19 are "paramount and superior to the leasehold interest" of Hunt. Accordingly, judgment was entered on November 4, 1977, dismissing Hunt's action on its merits and with prejudice. Hunt has filed a timely appeal from the district court's judgment. The following issues have been raised for determination by this court on appeal: Sections 47-19-41 and 1-01-25 of the North Dakota Century Code are relevant to the determination of these issues. They provide, respectively, as follows: A purchaser who has actual notice of facts or circumstances which would put a prudent man upon inquiry is deemed to have constructive notice of those facts which such inquiry would in all probability have disclosed had it been properly pursued. Northern Pacific Railway Co. v. Advance *381 Realty Company, 78 N.W.2d 705 (N.D.1956); City of Bismarck v. Casey, 77 N.D. 295, 43 N.W.2d 372 (1950); Doran v. Dazey, 5 N.D. 167, 64 N.W. 1023 (1895). A purchaser who fails to make such inquiry is not protected as a good faith purchaser under § 47-19-41, N.D.C.C., with regard to those prior interests of which he is deemed to have constructive notice by his failure to make such inquiry. Pierce Tp. of Barnes County v. Ernie, 74 N.D. 16, 19 N.W.2d 755 (1945). Hunt asserts that neither Kiker nor Target is a good faith purchaser whose interest is free of Hunt's oil and gas lease on the NW ¼ of Section 19. Hunt bases this assertion on the ground that both Kiker and Target had actual notice of circumstances which would have caused a prudent man to have made further inquiry resulting in actual notice of Hunt's oil and gas lease. Hunt asserts, therefore, that Kiker and Target must be deemed to have had constructive notice of Hunt's oil and gas lease upon their failure to make such reasonable and prudent inquiry. The trial court concluded that both Kiker and Target were good faith purchasers without actual or constructive notice of Hunt's oil and gas lease and that, consequently, both Kiker and Target acquired their interests in the NW ¼ of Section 19 free of Hunt's prior oil and gas lease. We must examine the record, in light of the foregoing statutes and case decisions, to determine whether or not the trial court erred in its conclusion that both Kiker and Target are good faith purchasers protected under § 47-19-41, N.D.C.C. Prior to Kiker's purchase of his mineral deed from the Glovatskys, it is undisputed that Pete Glovatsky told Kiker the NW ¼ of Section 19 was under lease. It is also undisputed that Glovatsky produced some delay rental receipts which indicated that Hunt had made annual payments to the Glovatskys of $640.00. Kiker testified, however, that he never looked at these delay rental receipts when Pete Glovatsky presented them. Upon learning that Glovatsky did not have a copy of the lease, Kiker made no further inquiry other than to check the Dunn County register of deed's office to determine whether such a lease was recorded. We conclude, as a matter of law, that Kiker failed to make the type of inquiry which a prudent man would have made under the circumstances. Kiker's seller, Pete Glovatsky, personally informed him that the premises were under lease and showed him rental receipts from the lessee. Faced with this information, Kiker apparently made no attempt to have Glovatsky obtain a copy of the lease when Glovatsky said he did not have one. Nor did Kiker question Glovatsky for more information about the $640.00 annual rental payments which the rental receipts showed that Glovatsky had been receiving from Hunt. Instead, Kiker chose to believe there was no lease without making further inquiries as the following testimony from Kiker reveals: Upon being informed by Glovatsky that the NW ¼ of Section 19 was leased, Kiker had a duty, as a prudent man, to make further inquiry to determine the nature and extent of the lease of which he had been informed. Such an inquiry would have in all probability resulted in Kiker's acquiring actual knowledge that Hunt had a current lease on the NW ¼ of Section 19. We hold that, under the circumstances before him, Kiker failed to make a reasonable and prudent inquiry as to the existence of a prior existing lease on the NW ¼ of Section 19 and *382 that, by his failure to make such inquiry, Kiker is deemed to have had constructive notice of Hunt's prior existing oil and gas and lease on the NW ¼ of Section. We further hold that Kiker is not a good faith purchaser without notice of Hunt's oil and gas lease and that Kiker's mineral deed is subject to Hunt's oil and gas lease on the NW ¼ of Section 19. The second issue which we must determine is whether or not the trial court erred in its conclusion that Target is a good faith purchaser without notice of Hunt's prior oil and gas lease on the NW ¼ of Section 19. Upon purchasing the mineral deed from the Glovatskys, Kiker executed an oil and gas lease with Target on January 13, 1977. Kaiser, the sole shareholder of Target, transacted this business with Kiker on Target's behalf. The evidence in the record is undisputed that Kiker did not inform Kaiser, prior to the execution of the oil and gas lease between Kiker and Target, that Pete Glovatsky had told Kiker that the NW ¼ of Section 19 was leased to someone else. Hunt asserts on this appeal, however, that Kiker's knowledge should be imputed to Kaiser and Target because the lease executed between Kiker and Target was not an arm's length transaction but was the product of an attorney-client and principalagent relationship between Kiker and Kaiser. Hunt's assertion is unpersuasive. The following comments to the Restatement of the Law, Agency 2d (1958), reveal the general rule that a principal's knowledge is not imputed to his agent: See, also: Kotzman v. Condit, 169 Okl. 422, 37 P.2d 412, 415 (1934); Luton v. Soper, 94 Mich. 202, 53 N.W. 1054 (1892); 3 C.J.S. Agency § 432 (1973). We adopt the view of the foregoing authorities that, with respect to an agent's liability, the principal's knowledge is not imputed to the agent. Assuming, arguendo, that Kaiser was acting as Kiker's agent upon execution of the lease between Kiker and Target, there is no legal basis upon which to impute Kiker's knowledge to Kaiser. The trial court made the following pertinent findings of fact with regard to the lease transaction between Kiker and Target: The trial court's findings of fact will not be set aside by this court on appeal unless they are clearly erroneous under Rule 52(a) of the North Dakota Rules of Civil Procedure. In re Estate of Elmer, 210 N.W.2d 815 (1973). Upon a careful examination of the record we conclude that the foregoing findings of fact by the trial court are not clearly erroneous. Based upon the trial court's findings, it is apparent that the lease entered into between Kiker and Target was based upon legitimate business purposes by both parties who were intending to profitably develop the oil and gas resources on the NW ¼ of Section 19. Although there very well may have been an attorney-client relationship between Kiker and Kaiser for the purpose of having Kaiser perform title investigations for Kiker, there is no evidence to support Hunt's assertion that the lease executed between Kiker and Target was not a bona fide arm's length transaction. Consequently, there is no legal basis upon which the knowledge Kiker possessed, upon executing the oil and gas lease with Target, can be imputed to Kaiser or to Target. Hunt also asserts that Target, through Kaiser, had constructive notice of Hunt's prior oil and gas lease by means of flags, drill holes, and other physical signs on the NW ¼ of Section 19 which were caused by survey and seismographic exploration crews. The trial court made the following pertinent findings of fact in this regard: Leonard Kostelnak, a farmer who lives three and one-half miles from the Glovatskys' farm, testified, with respect to the dates he observed survey or exploration work on his property and in the area, that: Pete Glovatsky testified, regarding exploration activity on his property, as follows; William A. Van Hook, the field manager for Sheehan Exploration, testified as follows: We conclude that there is substantial evidence to support the trial court's finding that Hunt failed to establish that survey or exploratory activity occurred on the NW ¼ of Section 19 as of January 13, 1977, prior to the execution of the oil and gas lease between Kiker and Target. Consequently, it is unnecessary to determine whether such activity would have given Target constructive notice of Hunt's prior oil and gas lease. The Sheehan Exploration Company, on or about January 6, 1977, filed a notice of intention to perform exploratory oil and gas drilling on various sections of land, including Section 19 of the Glovatsky property pursuant to § 38-08.1-04, N.D.C.C.[1] Hunt asserts that this filing gave constructive notice to Target of Hunt's prior oil and gas lease on the NW ¼ of Section 19. We disagree. The trial court entered the following findings of fact with regard to this issue: We conclude that Sheehan's filing of a notice of intent to drill, under § 38-08.1-04, N.D.C.C., did not give constructive notice to Target of Hunt's oil and gas lease on the NW ¼ of Section 19. The filing, at most, gave notice that Sheehan Exploration Company was employed by Gulf Oil Company to perform exploratory drilling on various sections of land. Such filing imports no notice as to the identity of oil and gas leases, if any, on the properties on which the exploratory activity is to be conducted. *385 We hold that Target is a good faith purchaser for value without notice of the prior oil and gas lease executed between Hunt and the Glovatskys on the NW ¼ of Section 19 and that Target's lease is not subject to Hunt's lease. The judgment of the district court is affirmed in part, reversed in part, and remanded with instructions to modify the judgment in accordance with this opinion. ERICKSTAD, C. J., and VOGEL and SAND, JJ., concur. PEDERSON, Justice, concurring specially. I concur in the result reached by the majority but I believe that it is inconsistent to treat the "determination" that Kiker was a bona fide purchaser in good faith as a conclusion of law, and then treat the "determination" that Target was a bona fide purchaser in good faith as a finding of fact. Both are mixed questions of fact and law and subject to full review by this Court without the strictures imposed by Rule 52(a), NDRCivP. [1] Section 38-08.1-04, N.D.C.C., provides: "Filing of notice of intention to engage in drilling.Any person desiring to engage in drilling within this state must, prior to actually engaging in such drilling, file a notice of intention to engage in drilling with the county register of deeds in each county in which drilling is to be carried on. The notice of intention shall include the name of the person who intends to drill; his address or principal place of business; the name and address of the resident agent for the service of process on said person; the date upon which drilling will commence; the township, range, section, and quarter-section in which drilling is to be carried on; and the estimated depth of the drill hole. Notices filed with the county register of deeds under this section shall be maintained in a manner separate and apart from any other records or indices concerning the land described in the notice."