OIL AND GAS LEASE.

[Sandusky Circuit Court,

May Term, 1898.]

King, Haynes and Parker, JJ.

#### N. B. Ervin, v William M. Masterman et al.

1. Agreement of Co-owners to form a Partnership for the Sinking, Equipping and Operating Oil Wells.

Co-owners of an oil and gas lease of certain lands agreed to form a partnership for the sinking, equipping and operating of oil wells thereon, upon the terms that each member was to contribute toward the cost of operations and any losses that might occur in proportion to his share or interest in such property, the necessary funds to be raised by assessments made upon and collected from the members, and each member to receive and sell on his own account and at his own pleasure his share of the gross product, *i.*e., the oil produced; and in pursuance of this agreement a firm name was adopted and the business carried on accordingly: *Held,*that this constituted a partnership partaking of certain characteristics of a “ mining partnership.”

2. Enforcement of Partner’s Lien.

In such case the partner’s lien may be enforced the same as in cases of ordinary commercial partnership.

3. Section 4112a, Rev. Stat., does not Prevent the Enforcement of the Partner’s Lien upon such Property.

Section 4112a, Revised Statutes, does not prevent the taking effect or enforcement of the partner’s lien upon such property ¡ nor the application thereto of the equitable doctrine that property purchased with partnership funds for partnership purposes shall be deemed and treated as partnership property, though the title may be taken in the name of an individual.

Appeal from the Court of Common Pleas of Sandusky county.

Parker, J.

This case comes into this court on appeal from the court of common pleas of this county. The petition sets forth in substance, that about *517March, 1896, the plaintiff and the defendants William M. Masterman, H. W. Townsend, F. W. Zórn and F. C. Hornung entered into a contract 0/ partnership under the firm name of The Ervin Oil Company for tha. purpose of owning, operating and developing a certain leasehold of oil lands and to produce and market the product of said lease; said leasehold being known and described as the Kimball lease situated in Freedom township, Wood county, Ohio, and containing about sixty acres of land. That since March, 1896, said partnership has been in the open and actual possession of said premises and engaged in drilling wells thereon and producing oil therefrom. That the place of business and office of said partnership is at Gibsonburg, Sandusky county, Ohio. That by the terms of said partnership agreement said leasehold and partenership property, consisting of structures, machinery, wells, engines, boilers, derricks, tanks, tools and other equipment of said property for the development of oil was to be held, owned and operated by said partnership, and said partners respectively were, to own the property of said partnership all and singular and to bear its expenses and share its gains in the following proportions: N. B. Ervin, Wm. M. Masterman and H. W. Townsend each a fourth interest, and said F. W. Zorn and F. C. Hornung each an eighth interest. That in the prosecution of said business said partnership borrowed large amounts of money which were used by said partnership in its business of drilling, shooting and completing oil wells on said lease and for other expenses of said firm, and that the real value of said lease consisted of said wells and equipment and the product of said wells; that said partnership owes for money borrowed and used as aforesaid to different creditors something over five thousand dollars; that said W. M. Masterman has become and is wholly insolvent. Francis H. Steel is also made a party defendant, and it is averred with respect to him that he claims some interest in or lien upon said partnership property growing out of certain alleged transfers and incumbrances said to have been made by said W. M. Masterman to him, and that he is claiming a right to sell, and has sold certain of said partnership property, and is threatening to cause a sale of certain other parts of said property of said partnership, and its oil product, by virtue of said transfers from Masterman, without an adjustment of the affairs of said partnership, the payment of its debts or the determination of the rights of .the plaintiff and his copartners, and that the alleged transfers and incumbrances made by Masterman to Steel were for the purpose of securing and providing for the payment of a private indebtedness of said Masterman to Steel. That the interest of Master-man in the partnership property is not more than sufficient to satisfy his just proportion of the partnership debts. That since about April 1, 1897, Steel has sold one-fourth of the oil product of said partnership property and kept and retained the proceeds thereof, in violation of the rights of said partnership, That because of the facts alleged it has become impossible to continue the business of said partnership. And plaintiff prays that the partnership may be dissolved and its affairs wound up; that an accounting may be taken of the business and affairs of said partnership and the partnership property applied to the payment of the debts and expenses of the firm, and that Steel may be required to account for the value of the oil which he has sold. This petition was filed on September 4, 1897; the date of service of summons upon Steel does not appear from the papers in our hands, but on October 2, 1897, Steel filed his separate answer in which he avers that on April 20, 1897, Masterman *518was the owner of an undivided one-fourth part of said leasehold and that on that date by writing duly executed and acknowledged he sold and transferred unto said Steel all his right, title and interest in and to said leasehold estate, the assignment aforesaid being recorded in volume “X” at page 167 of the records of leases of Wood county. He admits that he claims an estate and interest in the leasehold estate aforesaid and denies every other allegation of the petition, and prays that plaintiff’s petition may be dismissed.

To this answer the plaintiff replies denying the allegations thereof and averring that any assignment made by Masterman to Steel was solely as security or mortgage to secure payment of a loan made by Steel to Masterman individually, and was not for any debt of said partnership or loan to the same. That all of the property aforesaid was purchased with partnership funds; that the title thereto was taken and is held for the benefit and use of said partnership, and that any conveyance, assignment or transfer of any interest in the same that Steel may have received from Masterman was so received with full knowledge upon the part of Steel of the facts aforesaid and of the interest of the partnership in said property. The other defendants filed answers in which they admit and adopt the averments contained in the pleadings filed by plaintiff.

From the evidence submitted, it appears that on November 15, 1894, Joel Kimball and wife executed an instrument in which it is set forth that in consideration of seventy-five dollars, the receipt of which is acknowledged, they do grant unto N. B. Ervin and Wm. M. Masterman and their assigns, all the oil and gas in and under the premises described in the petition, together with the right to enter thereon at all times for the purpose of drilling and operating for oil, gas or water; to erect and maintain all buildings and structures and lay all pipes necessary for the transportation of oil, gas or water taken from said premises, excepting and reserving however the one-sixth part of all the oil produced and saved from said premises, to be delivered in the pipe line to the credit of the grantors. And this instrument provides that Ervin and Masterman and their assigns are to have and hold the premises on certain other conditions as to the amount to be paid for gas used off the premises; as to gas being furnished to the grantors for their dwelling house; as to the burying of oil and gas lines, paying damage to growing crops, etc., and various other provisions usual in instruments of this character, which are commonly known and designated as oil and gas leases. This instrument was duly executed and acknowledged, and was recorded in the lease records of Wood county on April 5, 1895. By an instrument bearing date of April 20, 1895, W. M. Masterman and N. B. Ervin assigned and transferred to H. W. Townsend an undivided one-fourth interest in said leasehold, and to F. C. Hornung and F. W. Zorn each an undivided one-eighth interest therein. This instrument is also duly executed and acknowledged, and was recorded on September 13, 1897. On April 25, 1895, all of the alleged partners, together with Joel Kimball, the owner of the land, joined in the execution of what is known among oil operators as a “transfer” or “division order,” which set forth their respective interests in the oil product from this lease as before stated, and which was filed with the Paragon Transportation Company for its information and guidance in settling for the oil which might be delivered to it from the farm. This paper certifies that they are the legal owners of the “Ervin & Co.” wells, being the wells on the Joel Kimball farm described in the petition, and that Kimball is entitled to one-sixth of the oil by way of royalty. *519It will be observed that one of the principal issues is as to whether there was and is in fact a partnership as alleged in the petition. The evidence bearing upon this issue consists of the instruments before mentioned, and of certain books of account kept by the alleged firm, and certain notes, checks, etc., given by the alleged partners in the course of the carrying on of this business, and of the testimony of the plaintiff,and ofF.W.Zorn as to the partnership agreement and course of business, which testimony is practically undisputed. Mr. Ervin testifies that the lease was originally taken by himself and Mr. Masterman in 1894, and that interests were transferred to the other parties in April, 1895, as appears from the instruments referred to; that at the time this lease was acquired and these interests were transferred there had been no oil development upon this land or elsewhere within three-quarters of a mile of it; that at or about the time the transfer was made, all of the parties then interested in the lease agreed to drill a test well; that they then formed a partnership with the understanding that they were to drill a test well and that if that should prove to be a failure the arrangement would be terminated, and they would give up the lease, but if it proved to be successful they would go on and operate the lease, and each was to bear a just proportion of the expenses of drilling the test well, and if it should prove successful each was to bear a just proportion of the cost of equiping and operating the well; that they were to share this expense in the proportion of their respective interests in the lease as before stated. In regard to the sale of the oil, each was to sell his own, as the witness states “in lieu of a dividend;” that this was done so that each member might control his own share of the product, taking advantage of the markets and selling according to his own judgment. Witness also testifies that each was to bear his share of the losses if any occurred in the course of drilling and operating wells upon the lease; that Zorn was to be book-keeper for the firm, and was to have charge of the financial business of the firm, but witness was to assist him therein, and that the firm name adopted was “The Ervin Oil Company.” That in pursuance of this arrangement they drilled a well, which, proving successful, they continued to drill and operate until they have upon the premises eight wells; that whenever it became necessary to have funds to carry on these operations, assessments were made upon the members according to their holdings, and that these assessments have all been paid by the different members of the firm, including Masterman, but that the indebtedness of the firm, which has not been discharged by assessment, and which was incurred in purchasing casing, tubing, machinery, boilers, rigs, drilling wells, etc., amounts to over five thousand dollars; twenty-four hundred dollars and interest being due to the New London National Bank on a promissory note which is signed “Ervin Oil Company by F. W. Zorn,” and also by the. members of the company individually, and $589.43 being due the National Supply Company upon a note which is signed “Ervin Oil Company by F. W. Zorn,” but is not signed by any of the individual members of the company. This witness produces checks drawn upon the account of The Ervin Oil Company in the bank of The Gibsonburg Banking Company in payment of debts of the Ervin Oil Company for supplies, equipment, etc., for the lease, signed “Ervin Oil Company, by F. W. Zorn,” and states that that was the usual method of transacting the business of the company; that a fund belonging to the partnership was kept in the bank in the name of The Ervin Oil Company, which fund was produced by the collection of assessments upon the members as before stated. *520The books of the Ervin Oil Company, introduced in evidence, show that the accounts were kept in a manner consistent with apartnershipbusiness and with the statements of this witness as to the manner in which the business of the Ervin Oil Company was carried on. As to the possession of the premises described in the lease, this witness and others testify that after they began operations they continued in the daily and constant occupation of the premises, producing oil therefrom, so that a person going upon the premises at any time would have found them or their employees at work there. He testifies that all of the contracts made with the employees, and with contractors to drill wells, and in short, that all who had dealings with the company, were made on behalf of the partnership and in the name of The Ervin Oil Company; and that all obligations were discharged by the company’s checks upon a fund in the bank as before stated signed Ervin Oil Company by E. W. Zorn. The testimony of Mr. Zorn agrees in the main with that of Mr. Ervin. He states that the total cost of equipping and operating the lease since they began, all discharged in the manner stated excepting something over five thousand dollars still unpaid, amounts to about sixteen thousand dollars. In our opinion this evidence establishes a partnership. If not an ordinary commercial partnership, at least a partnership *inter sese*partaking of the characteristic of a mining partnership, having as one of its incidents a right in each member to require that partnership property shall be applied to the debts due to the creditors of the partnership before it shall be devoted to the discharge of the individual indebtedness of the members thereof. There is much in the nature of the business of mining for oil, as carried on in this country that likens it to mining operations and the uses of mining properties where ore instead of oil is the product, and we think that many of the special rules applicable to mining partnerships so called, should be applied to the operations carried on by co-owners of oil producing property, in order that the ends of justice may be reached both as respects said co-owners and those transacting business with them, and it is immaterial whether such co-owners shall be regarded as tenants in common or joint tenants, and whether the property used in such business shall be real estate, chattels real or personal chattels. One of the incidents of a mining partnership is that, if a member sells his interest in the mine, the purchaser .takes it subject to any lien existing in favor of a copartner for debts dtte the creditors or for advances made for the use of the concern, unless he becomes a purchaser in good faith for a valuable consideration without notice of such lien. Ana, if a person sells his interest in a mining company while it is engaged in working its mining ground, the purchaser will be deemed to have bought with notice of any lien resulting from the relation of the partners to each other and to the creditors of the partnership. Buryea v. Burt, 28 Cal., 569. Each partner may transfer his interest without consulting his fellow partners, and such transfer will not work a dissolution of the partnership. Jones v. Clark, 42 Cal., 180.

It is a matter of common knowledge that customarily co-owners of oil leases and the equipment thereof transfer their respective interests in such property, as well as in the product, without the consent of those interested with them as co-owners, and that purchasers thereof are admitted into the company or firm as a matter of right, and the business is continued, and no dissolution of the partnership occurs from such transaction merely.

*521Quoting from Bindley on Partnerships, secs. 54 and 55: “Tenants in common or joint tenants of a mine or quarry may or may not be partners ; and the mine or quarry itself may or may not be part of the common stock. But it is highly inconvenient, if not altogether impossible, for co-owners of a mine or quarry to work it themselves without becoming partners, at least in the profits of the mine, and partners who work a mine or quarry in common are regarded rather as partners in trade than as mere tenants in common of the land.”

In Butler Savings Bank v. Osborn et al., 159 Pa. St., 10, it is held that tenants in common engaged in the improvement or development of the common property will be presumed, in the absence of proof of a contract of partnership, to hold the same relation to each other during such improvement or development as before it began; that as to each other their relation depends on their title until, by their agreement with each other, they change it, and that when tenants in common of an oil lease agree to carry on operations upon their land, each contributing toward the expenses in proportion to his respective interest in the land, they will be considered with respect both to themselves and third persons as the ordinary owners of land working their respective shares of the wells, responsible only for their own acts, subject to no laws of partnership whatever, and possessing distinct rights in the property; and in that case, the tenants in common having entered into an agreement with each other to drill wells on the leasehold property, each to pay one-half of the costs of sinking the wells and pumping the oil, the oil prqduced to be run into pipe lines serving the district, and there credited one-half to each of the tenants in common, it was held that no partnership existed between the tenants in common. But in that case, as well as in Dunham, appellant, v. Loverock, 158 Pa. St., 197, and Neill, appellant, v. Shamburg, 158 Pa. St., 263, and other cases decided by the courts of Pennsylvania, the doctrine is fully recognized that a partnership for the operation of an oil lease may exist between co-owners, and that, the agreement of the parties with respect to the carrying on of the "business has a controlling effect. In the case at bar we have the undisputed testimony of the witnesses as to the fact that a partnership was agreed upon, and, as before stated, the method of carrying on the business as shown by the evidence including the books, checks, notes, etc., introduced in evidence is consistent with a partnership arrangement, and tends to corroborate and confirm the statements of the witnesses that there was a partnership. In Bindley on Partnerships, which is an English work, it is said that a partnership will not result under an agreement to share the gross returns, or the gross products; but that result does not seem to follow in the United States. In this country a partnership may exist though the agreement is to share the gross products. Indeed it is not apparent why the English rule obtains. The actual or gross returns include profits, if profits have been made, and while such returns do not include losses, if losses are incurred, yet, where the persons associate together in business, agree to and do meet all the expenses and financial demands of the business through the medium of assessment or otherwise, though they divide the gross product, they have in the end, as the result of their enterprise, the net profit only, and the result is precisely the same as if the agreement were in the first instance to share the net profit instead of the gross product.

In The Farmers’ Ins. Co. v. Ross & Lennan, 29 O. S., 429, Judge Gilmore, speaking for the court, at page 432, quotes the following para*522graph from Story on Partnership, sec. 27, to-wit: “When each of the parties contributes labor and services and materials in the manufacture of any articles of trade, and the articles, when made, are to be equally or proportionately shared between them, they will-be deemed partners inter sese; for the articles manufactured, and so to be divided, may well be .deemed the profits or losses of their joint undertaking and business." And, while the decision of that case does not rest upon the principle quoted, yet, this- language from Justice Story’s work is quoted with approval, and it is distinctly intimated that if necessary it would have been applied to that case. This doctrine finds support in Autray v. Fries, 59 Ala., 587; Everett et al. v. Chapman et al., 6 Conn., 347; Stapleton v. King, 33 Iowa, 28; Curtis v. Cash, 89 N. C., 41; and Jones v. McMichael, 12 Rich., (S. C.) 176. We hold that where all the other indicia of a partnership are unquestionably present, the mere fact that the gross product is to be divided, instead of the net profit, will not necessarily prevent a partnership, especially where by reason of the partnership obligations being met from time to time by means of assessment or otherwise, the result to the partnership is precisely the same as if the net profit were the subject of division, instead of the gross product. It is zealously contended, however, on behalf of the defendant Steel, that where the title to real estate or chattels real amounting to a right to produce oil is vested in an individual or individuals, sec. 4112a, Rev. Stat., preclude a court of equity from giving effect to the principles which govern such courts in other cases where they treat such property as partnership property, and such titles as held in trust for the partnership, and that this same section of the statutes prevents the courts from giving effect to the “partners’ lien” upon such property. The attaching of the partners’ lien, or of the equity which results in real estate, or an interest therein, being regarded and treated as partnership property, though the legal title is vested in a member or members of the firm, does not, in our judgment, come within the purview of sec. 4112a, Rev. Stat., which provides: “That all leases, arid licenses and assignments thereof or, of any interest therein heretofore executed, given or made, for, upon, or concerning any lands or tenements in this state, whereby any right is given or granted to operate, or to sink or drill wells thereon for natural gas and petroleum or either or pertaining thereto, shall be recorded in the lease record * * * and shall not have any force or validity until the same is filed for record as aforesaid,” etc. Such equitable results arising from the purchase money having been paid by the partnership, and the property having been used for partnership purposes, are not affected by this statute. They do not arise out of the terms or provisions of leases or licenses or assignments thereof, or of any interest therein, or other instrument falling under the provisions of this section; nor does the recognition of such equities amount to a transfer of an interest in land, either by the parties or by the courts, within the meaning of said section. Land, or interests in land, may be regarded and treated as partnership property notwithstanding the provisions of the Statute of Frauds, or the statute governing conveyances and incumbrances, including sec. 4112a, Rev. Stat. Norwalk National Bank v. Sawyer, 38 O. S., 339; Page v. Thomas, 43 O. S., 38; Kemper v. Campbell, 44 O. S., 210; Bank v. Johnson et al., 47 O. S., 306. The defendant Steel is not in a situation to object to the application of these rules giving effect to the partners’ lien and to the trust in favor of the partnership. Taking no account of the evidence which tends to show that he was advised of this partnership relation, or, *523by the firm’s possession of the property, was put upon inquiry and had constructive notice as to such relation and the rights growing out of it, we look for a moment at the nature of his claim and the circumstances under which it arose. About November 30, 1896, Masterman borrowed from Steel two thousand dollars, for which he gave his promissory note; at the same time he signed and gave to Steel a certificate of transfer, addressed to the Paragon Refining Company, (a branch of the same corporation as the Paragon Transportation Company before referred to), of which Steel was the vice president and general manager, authorizing said company to transfer to Steel, upon their books, the one-fourth interest of Masterman in the wells 'on the Kimball farm. This paper, which was received by Steel and which bears his signature upon that part which certifies to the Paragon Refining Company that he is the owner of the interest thus transferred to him, names the interest transferred as “an interest in the wells of the Ervin Oil Company” on the Joel Kimball farm. Afterwards, on April 20, 1897, and before the maturity of this note, Masterman executed in due form an assignment to Steel of his interest in the Kimball lease. This was recorded on September 27, 1897, in the lease records of Wood county, Ohio. Omitting the acknowledgment, it reads as follows: “This assignment made this 20th' day of April, A. D. 1897, by and between W. M. Masterman of Gibsonburg, Ohio, of the one part, and F. H. Steel, of Toledo, Ohio, of the other part; Witnesseth: That for and in consideration of one dollar, to me paid to my full satisfaction by the said F. H. Steel, I have sold, assigned and transferred, and by these presents do hereby sell, assign and transfer unto the said F. H. Steel, all my right, title and interest in the following leases of land situated in the counties of Sandusky and Wood, and State of Ohio, described as follows: A half interest in the west half of the north half of the northeast quarter of section 12; also the north half of the southeast quarter of the southwest quarter of section 1, both of Woodville township, Sandusky county, Ohio, containing sixty (60) acres leased bv Wm. Bidke. A one-quarter interest in the south sixty (60) acres of the northeast quarter of section 25, Freedom township, Wood county, Ohio, leased by Joel Kimball to N. B. Ervin and W. M. Masterman. To have and to hold all my right, title and interest in the above mentioned leases, (subject to the conditions mentioned therein), together with the wells, tubing, casing and fixtures thereon, or which pertain thereto, to the said F. H. Steel, his heirs and assigns. In witness whereof, I have hereunto set my hand and seal the day and year first mentioned.

(Signed) W. M. Masterman.”

In the presence of D. D. Grant, Thos. Kelley. (Acknowledged in due form.)

From the testimony of Steel and Masterman, as well as from this instrument, it appears that the transfer certificate of November 30, 1896, was given as a security for this loan, and that this assignment of April 20, 1897, was given as a further security for the debt then existing, and that there was no additional or new consideration therefor. That Steel was not in the situation of an innocent purchaser for value is quite clear from the authorities. Eaton & Co. v. Davidson, 46 O. S., 355; Page v. Thomas, 43 O. S., 38; Grever & Sons v. Taylor, 53 O. S., 621.

We hold, therefore, that the prayer of plaintiff’s petition should be, and it is, granted, excepting as to the oil sold by Steel before he was served with process in this case. It appearing that the partnership agreement authorized each partner to sell his respective interest in the *524oil produced, we hold that Steel acquired by the transfer certificate a per feet title to the oil produced and sold prior to the time the suit to reach Masterman’s interest in the oil, as well as the property, was pending as to Steel. That, while a perfect title to the oil produced could be conveyed, yet, the partners had a right to impress the partners’ lien upon the oil production not actually brought to the surface, reduced to possession and sold, as well as upon the other partnership property; that the institution of the suit was notice, not only of the partners’ rights, but of their purpose in that respect, and that it operated by way of lis pendens as to all of the property aforesaid.

Bartlett & Wilson, Andrews & Andrews, attorneys for plaintiff.

Swayne, Hayes & Tyler, attorneys for defendants.

Since this is an action to wind up the business of the partnership, and in doing this it becomes necessary to ascertain the state of the account of each partner, and the interest of each, including Steel, in the partnership stock and property, we conclude to order that áll the costs, including those incurred upon the trial of the issues between Steel and the others, shall be paid out of the partnership fund.

A decree will be entered accordingly.