No. 80-47 INTHE SUPREME COURT OF THE STATE OF MONTANA 1980

ED SKILLMAN, Plaintiff and Appellant,

THE DEPARTMENT OF STATE LANDS OF THE STATE OF MONTANA; THE BOARD OF LAND COMISSIONERS and JAMES R. FOSTER, Defendants and Respondents.

Appeal from: The District Court of the First Judicial District, In and for the County of Lewis and Clark, The Honorable Peter G. Meloy, Judge presiding. Counsel of Record: For Appellant: Harrison, Loendorf and Poston, Helena, Montana For Respondents: David Woodgerd, Department of State Lands, Helena, Montana H. A. Bollinger, Bozeman, Montana

Submitted on Briefs: June 5, 1980 Decided: 

## JUL28 

## 1980Mr. Justice John Conway Harrison delivered the Opinion of the Court. Respondent Ed Skillman petitioned the DistrictCourt forjudicial review of a decisionby the State Board of Land Commissioners torenew a lease of state land toJames R. Foster. The Board of Land Commissioners had renewed the lease after finding thatFoster had a preference right. The DistrictCourt held the Board of Land Commissioners erred in renewing the 

### lease. The courtremanded the case to the Board with directions tocancel the Foster lease and 

### lease the land without a preference right. The Department of StateLands and the StateBoard of Land Commissioners appeal the decision of the DistrictCourt asserting the lease to Foster should be reinstated. Skillman cross-appeals contending the court should have awarded the 

### lease to him rather than ordering the leasereopened for bids. The facts inthis case arenot disputed by the parties. Foster held a Stateof Montana surface lease to 640 

### acres of grazing land inPark County, Montana. The lease expired on February 28, 1979. On January 2, 1979, Foster applied to

renew his lease on the land ata rateof $7.50 per AUM (animal-unit-month). On January 23, 1979, Skillman applied to 

### lease the land ata 

### rate of $18.75 per AUM. Foster was notified of the bid submitted by Skillman and informed that

ascurrent 

### lessee he was entitled to exercise a preference right tomeet the bid. Foster exercised the preference and metthe bid on February 22, 1979. The leasewas renewed to him on February 28, 1979. Foster alsorequested and was granted a hearing to determine whether the bid was in the best interestof the State of Montana. StateLand Commissioner Leo Berry conducted the hearing on thematter on March 27, 1979. Evi-dence introduced atthe hearing showed that Foster had subleased the land to

### JimSerrazzenbut had not filed a sublease form with the Commissioners. Subsequent to the hearing, Commissioner Berry recommended that 

### a renewal lease be issued toFoster atthe rate of $7.50 per AUM. The Board accepted the recommendation and renewed the lease atthe $7.50 rate. On July 

### 2, 1979, the Department of State Lands canceled Foster's lease for failure to filea sublease. On cancellation of the 

### lease, itwas explained toFoster that his leasewould be renewed if he paid 

### a penalty of 50 percent of the annual rental of the land. Foster paid the penalty, and the lease

### was reinstated. The following issue 

### israised by the Department of StateLands for review: Did the DistrictCourt 

### err indetermining Foster should not be granted a preferential right to lease the land in question under the authority of Jerke v. State Department of Lands (1979), Mont. 

## , 597 P.2d 49, 36 St.Rep. 

### 389? Respondent Skillman raises the following issue on cross-appeal: Did the DistrictCourt 

### err indeclaring the land in question should be reopened for public bid rather than awarding the 

### lease to Skillman? The arguments of the Statearenot persuasive inthis

case. Although the State

### iscorrect in stating thatJerke is limited toits facts, the distinctions made by the State

arenot fatalto 

### its application here. As Chief ~ustice Haswell pointed out inJerke, the crucial point of the 

### case is this:"To allow an existing 

### lessee who does not use the land toexercise 

### a preference right constitutes an unconstitutional application of the preference right statute, section 81-405(1), R.C.M. 1947, now section 77-6-205 (1) 

## ,MCA." 597 P.2d at51, 36 St.Rep. 

### at 392. The 

### mere fact that the lessee in this case 

### is an individual instead of a grazing district

### isnot sufficiently material to the policy involved to disallow the application of the precedent. Further, if the case 

### isdistinguishable and Jerke should n6t be controlling 

### as precedent, there is even more justification for applying the rationale of Jerke here. In Jerke, although there was a sublease involved, there 

### isno evidence that there was an illegal sublease, 

### as in the case before us. Here the lessee, Foster, sublethis grazing leasewithout having the sublease approved by the Department of StateLands asrequired by his 

### lease with the State. Section 77-6-205(1), MCA, recites inapplicablepart: "(1)A lessee of state land classed as agricultural, grazing, town lotor city lotwho has paid allthe rentalsdue from him to the state and who has not violated the 

### terms of his 

### lease 

### --- 

### - --- is entitled tohave his lease renewed 

# . .." (Emphasis supplied.) Further, ARM §26.3.108(2) establishes the Department's policy: "(2)A surface 

### lessee has a preference right torenew his leaseprovided 

### allrentals have been paid and the 

### terms 

## -- of the previous lease have notbeen violated." (Emphasis supplied.) 

### --- A strictreading of these statutes raises 

### a serious question whether Foster even had a right to renew (section 77-6-205, MCA) or a preferential right inthe leasing procedure (ARM §26.3.108(2)), when this case was filed in DistrictCourt. Assuming his sublease arrangement, although not approved by the Department, 

### was not sufficient to deprivehim of hispreference right, he would clearly be the type of 

### lessee that the policy of Jerke was designed to affect. In consideration of our reasoning inJerke, 

### we are compelled to apply the same reasoning to the case before us. In Jerke, 

### we held: "Where the preference rightdoes not further the policy of sustained yield, 

### it cannot be given effect. In such a situation, fullmarket value can be obtained only by pure competitive bidding. Here, the Grazing District, the holder of the preference right, does not even use the land; 

### it cannot use good agricultural practices ormake improvements thereon. 

# .

# . "To allow the preference right tobe exercised inthis case would be to install the Grazing 

### District as the trustee of the land. It, rather than the Department of StateLands, would decide who 

### willoccupy the land, but 

### it would not be bound by a constitutional or fiduciaryduty. Under such a scheme, the concept of sustained yield would have no place." 597 P.2d at51, 36 St.Rep. at391. There appears tobe no operative facton the record here thatwould justify overruling the trial court's decision to follow Jerke. Every point of law and every policy consideration 

### isas applicable toFoster as 

### it was to the grazing district. Therefore, the underlying rationale that originally decided Jerke is equally dispositive of this

case.On cross-appeal Skillman contends thathe should be awarded the lease because he was the highest bidder when bids 

### were originally opened. He interprets the language of Jerke and section 77-6-205(2), MCA, relating to "pure competitive bidding" 

### as meaning bidding once and a subsequent award to the highest bidder. It would be truly inequitable to follow this interpretation. Foster was under the impression thathe would have

a valid preference right, and he should not be penalized for

### that good faithbelief. He should have an equal opportunity tobid on the lease. Indeed, if he 

### isnot allowed toparticipate, then the spiritof the competitive bidding statute would be defeated. In addition, Foster had no reason to suspect that he could not exercise the preference right since Jerke had not been decided by thisCourt. The judgment of the District Court 

### is affirmed. The lease 

### is canceled and reopened for bidding by 

### allparties.

We concur: 

# 34%~ Chief Justice ,/