Case Name: STATE ex rel. DICKGRABER, Respondent, v. SHERIDAN, TREASURER, et al., Appellants
Court: Montana Supreme Court
Jurisdiction: Montana
Decision Date: 1953-03-05
Citations: 126 Mont. 447
Docket Number: No. 9277
Parties: STATE ex rel. DICKGRABER, Respondent, v. SHERIDAN, TREASURER, et al., Appellants.
Judges: MR. JUSTICE BOTTOMLY concurs.
Reporter: Montana Reports
Volume: 126
Pages: 447–477

Head Matter:
STATE ex rel. DICKGRABER, Respondent, v. SHERIDAN, TREASURER, et al., Appellants.
No. 9277.
Submitted Mareb 2, 1953.
Decided March 5, 1953.
254 Pac. (2d) 390.
Arnold H. Olsen, Atty. Gen., William F. Crowley, H. M. Brickett, Asst. Attys. Gen., for appellants.
Wellington D. Rankin and Arthur P. Acher, Helena, for respondent.
Mr. Olsen, Mr. Crowley, Mr. Rankin and Mr. Acher argued orally.

Opinion:
MR. CHIEF JUSTICE ADAIR:
In the calendar year 1952 the state board of land commissioners acting pursuant to the laws of the state of Montana, R. C. M. 1947, secs. 81-103 and 81-1701 et seq., and the regulations, customs and practices of the board, from time to time, advertised various separate tracts of particularly described public school lands as being open for oil and gas leasing through oral competitive bidding at public auction. These lands had been donated and granted to the state by the federal government for the support of the common schools pursuant to the provisions of the Enabling Act approved February 22, 1889, 25 Stat. 676.
As a result of the auction sales so held in 1952, the state received in cash from the successful bidders the aggregate sum of $5,790,424.32, all of which was treated and handled as money rents received from the leasing of the above school lands and five per cent of such amount has been placed in the permanent school fund as is required by sec. 5 of Article XI of the Constitution of Montana.
The balance of cash so received from the successful bidders in -the sum of $5,500,903.10 and representing 95 % of all the moneys so received has been placed in the common school interest and income fund to be apportioned and distributed annually to the several school districts in the state as provided in Article XI, sec. 5 of the Constitution of Montana.
The instant action was brought in the district court of Lewis and Clark County by a taxpayer. After trial had, a judgment and order was entered granting a permanent injunction enjoining the appellants, Charles L. Sheridan as state treasurer and John J. Holmes, state auditor, from disbursing to the respective county treasurers throughout the state of Montana the $5,500,-903.10 so received from the successful bidders in consideration of the oil and gas leases that had been executed and delivered to each. This is an appeal from the judgment and order so entered in the district court.
Each lease so executed and delivered by the board to each successful bidder was on a printed form, specially prepared by the state to conform with the various rules and regulations prescribed by law and governing the leasing of its school lands, such printed form being known as "State of Montana Oil and Gas Lease," Form No. 3. The printed form, in part, reads:
State of Montana OIL AND GAS LEASE 3681-52
THIS INDENTURE OF LEASE, Made and entered into by and between the State of Montana, by and through its lawfully qualified and acting State Board of Land Commissioners, hereinafter referred to as lessor, and the person, company or corporation herein named, hereinafter referred to as lessee, under and pursuant to the terms and provisions of Chapter 175 of the Political Code of the Revised Codes of Montana, 1935, and all acts amendatory thereof and supplementary thereto, WITNESSETH:
The said lessor in consideration of the annual rentals hereinafter stated, the receipt of which for the first year of this lease is hereby acknowledged, the royalties to be paid, and the covenants to be kept and performed by the lessee, hereinafter set forth, has granted, demised, leased, and let, and by these presents does grant, demise, lease, and let unto the said lessee, for the purpose of mining and operating for oil and gas, and of laying pipe lines, building tanks, power stations, and other structures thereon necessary in order to produce, save, care for, dispose of and remove the said products, all the lands herein described, as follows:
Date this lease takes effect: November 26, 1952
Name of Lessee: Robert B. Smith
Address: P. O. Box 749, Madill, Oklahoma
Land Located in McCone County
Description of land: All Sec. 36. Twp. 19 N. Rge 47 East Countj McCone County
Total number of acres 640, more or less, belonging to School GriOillt
First year $3360.00
Annual rental, payable each year in advance,
Thereafter $480.00
TO HAVE AND TO HOLD the said premises, with the appurtenances, unto said lessee and successors, legal representatives or assigns, for the term of TEN YEARS and as long thereafter as oil or gas in commercial quantities shall be produced from the said land, not exceeding, however, the total period of TWENTY YEARS from the date this lease takes effect, SUBJECT to all of the terms and conditions herein set forth.
IT IS MUTUALLY UNDERSTOOD, AGREED AND COVENANTED BY AND BETWEEN THE PARTIES TO THIS LEASE AS FOLLOWS:
2. The lessee shall pay to the lessor an annual money rental in the amount hereinabove stated being not less than Seventy-five cents (75(5) for each acre of land held under this lease from year to year, PROVIDED, however, that the amount of such money rental so payable shall in no case be less than Fifty Dollars ($50.00) per annum and such rental shall be due and payable thirty days before the beginning of each subsequent year of this lease.
3. The lessee shall pay in money or in kind to the lessor at its option as hereinafter provided during the full term of this lease in addition to the annual money rental hereinabove stated, a royalty on the average production of the oil from the producing wells under this lease for each calendar month as follows:
A. 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, twelve and one-half percentum (12%%).
B. On that portion of the average production of oil or casing-head gasoline for each producing well exceeding 3,000 barrels but not exceeding 6,000 barrels for the calendar month, seventeen and one-half pereentum (17%%).
C. On that portion of the average production of oil or casing-head gasoline for each producing well exceeding 6,000 barrels for the calendar month, twenty-five pereentum (25%).
4. The lessee shall also pay in money or in kind to the said lessor at its option as hereinafter provided during the full term of this lease a royalty on the gas produced from the wells under this lease whether the said wells produce oil and gas or gas alone, a flat royalty of twelve and one-half pereentum (12%%).
5. All wells under this lease shall be so drilled, maintained and operated as to produce the maximum amount of oil which can be secured without injury to the wells and the aforesaid royalties shall be based and calculated oh such full production o°f oil; but the lessee shall have the right to apply to the State Board of Land Commissioners for permission to curtail production as provided in paragraph 12 of this lease. All royalties shall be calculated upon the total amount produced and saved under this lease exclusive of oil or gas used for light, fuel or operating purposes in connection with the work on the lands under the lease.
6. The lessee shall pay to the lessor in cash for such royalty oil and gas at the rate of the posted field price therefor existing on the day such oil or gas was run into any pipe line or storage tank to the credit of the lessee plus any bonus or other increase in price actually paid or agreed to be paid to the lessee; provided, however, that at the option of the lessor exercised not oftener than once every thirty days by notice in writing the lessee shall deliver the State's royalty oil or gas free of cost or deductions into the pipe line to which the wells of the lessee may be connected or into any storage designated by the State and connected with such wells. The lessee shall not be required to furnish storage for the State's royalty oil for more than thirty days following the date of production thereof when a market therefor is available.
7. In all cases where there is no posted field price for oil or gas produced under this lease, the payments in cash for the royalties payable hereunder shall never be less than the price actually obtained therefor or the reasonable market value thereof at the wells produced at the time of the sale of the same; and if the price obtained appears to the State Board of Land Commissioners to be less than the actual reasonable market value, then such actual reasonable market value shall be fixed and determined by mutual agreement between the lessee and the said Board. This lease is granted upon the express condition that the value of the State's royalty gas shall not at any time be figured at less than five (5‡) cents per 1,000 cubic feet.
18. The lessee may assign this lease either in whole or as to any regular subdivision thereof, embracing not less than 40 acres, to any qualified assignee, providing that such assignment shall not be binding upon the State until it has been filed in the office of the Commissioner of State Lands and Investments accompanied by the required fees and bond together with such proof of qualifications of the assignee as may be required by the State Board of Land Commissioners and has been approved by sueh Board.
19. The said lessee shall have the right at the termination of any rental year, by giving at least 30 days previous notice in writing to the Commissioner of State Lands and Investments to surrender and relinquish this lease and thereupon be discharged from any obligation not therefore accrued.
The first paragraph of section 11 of the Enabling Act as amended, in part, provides: "That all lands granted by this act shall be disposed of only at public sale after advertising— tillable lands capable of producing agricultural crops for not less than ten dollars ($10.00) per acre, and lands principally valuable for grazing purposes for not less than five dollars ($5.00) per acre. " Thus did Congress place a minimum price per acre which the lands must bring when and if sold.
The second paragraph of section 11 of the Enabling Act as amended provides: ' ' The said lands may be leased under such regulations as the legislature may prescribe; but leases for grazing and agricultural purposes shall not be for a term longer than ten (10) years; mineral leases, including leases for exploration for oil and gas and the extraction thereof, for a term not longer than twenty (20) years; and leases for development of hydro-electric power for a term not longer than fifty (50) years." Thus did Congress authorize a leasing of the lands "including' leases for exploration for oil and gas and the extraction thereof".
Section 3 of Chapter 108, Laws of 1927, p. 363, now R. C. M. 1947, sec. 81-1703, in part, provides: "The minimum annual money rentals to be paid to the state for oil and gas leases under the provisions of this act shall be seventy-five cents (75$) for each acre of land leased; provided, however, that such rental shall in no case be less than fifty dollars ($50.00) per annum." Thus has the legislature prescribed a minimum annual money rental per acre (75$) and also a minimum total annual rental per lease ($50.00). However, the legislature has prescribed no maximum annual money rental per acre nor has it prescribed any maximum annual total rental per lease. Whether the bidder acquire his lease for a bid of 75$ per acre or for a bid of $420 per acre the character of the transaction remains the same and cash consideration paid in advance for one year's rent is nevertheless rental money.
Hnder the provisions of section 3 of Chapter 108, Laws of 1927, one may bid an annual rental, payable in advance, of $1.00 for each acre of a forty-acre tract, being 25$ per acre higher than the 75$ per acre minimum set by law, but the board would be required to reject such bid and decline to issue a lease because the total annual rental would be but $40 and the law says "that such rental shall in no ease be less than fifty dollars ($50.00) per annum."
Section 4 of Chapter 108, Laws of 1927, p. 364, now R. C. M. 1947, sec. 81-1704, as amended by Chapter 61, Laws of 1951, pp. 108-109, provides: "In every oil and gas lease granted by the state there shall be reserved to the state as consideration therefor, in addition to the rentals as hereinbefore provided, a royalty in all oil and gas produced and saved from all lands covered thereby, and not used for light, fuel, and operation purposes on the leased premises, which shall be equivalent to the full market value, as ascertained by the state board of land commissioners at the date of such lease, of the estate or interest of the state in the lands and oil and gas deposits disposed of under such lease; provided 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 3000 barrels for the calendar month. Such lease shall provide for the rendering of payment of such royalty in the following manner and upon the following terms:
" 'The lessee shall pay to the state, in cash, for all oil and gas royalty reserved, the posted field price existing on the day such oil or gas is run into any pipe line or storage tank to the credit of the lessee, plus any bonus actually paid, or agreed to be paid, to the lessee, for such oil or gas; or, at the option of the state, exercised in writing by the State Board of Land Commissioners not oftener than every thirty (30) days, the lessee shall deliver the state's royalty oil or gas free of cost or deductions, into the pipe line to which the wells of the lessee may be connected or into any storage designated by the state and connected with such wells.' " Emphasis supplied.
Chapter 108, Laws of 1927, at the time of its enactment was considered to be a rather complete code on the leasing of state lands for exploration for oil and gas and the extraction thereof, and in such enactment the legislature for the first time uses the word "bonus" in connection with oil and gas leases.
Section 12 of Chapter 108, Laws of 1927 (now R. C. M. 1947, sec. 81-1712), provides: "All fees, rentals, penalties, royalties and bonuses collected for or under such leases shall be paid to the register of state lands and by him credited as follows: All fees and penalties shall be credited to the state general fund; all rentals shall be credited to the income fund of the grant to which the lands under each lease belong; all moneys collected as royalties and bonuses shall be credited to the permanent fund arising from the grant to which the land under each particular lease belongs and become and forever remain an inseparable and inviolable part thereof; provided, however, that all royalties and bonuses collected from the lands forming part of the capitol building grant shall be available as income the same as all other receipts from such lands; and provided further that all moneys received as rentals, royalties and bonuses for or under leases on lands owned by the state of Montana and not held in trust for the public schools of the state or for any state institution shall be credited, one-half to the state general fund and one-half to the state permanent revenue fund as defined by article XXI of the constitution." Emphasis supplied.
It is clear that the "royalties and bonuses" mentioned in section 12 of Chapter 108, Laws of 1927, are the same royalties and the same bonuses theretofore mentioned in section 4 of the same Act, Ch. 108, and that such royalty and such bonus become available only as and when the oil is produced and after "such oil is run into any pipe line or storage tank to the credit of the lessee, ' ' at which time the state is entitled to receive its share of "any bonus actually paid, or agreed to be paid, to the lessee, for such oil". Chapter 108, sec. 4, Laws of 1927, R. C. M. 1947, sec. 81-1704.
The quoted words "such oil" refer to and only mean such oil as has been produced and has been "run into any pipe line or storage tank to the credit of the lessee," and the phrase "plus any bonus actually paid, or agreed to be paid, to the lessee," means the additional amount, premium or bonus for which the oil is sold, over and above "the posted field price existing on the day such oil is run into any pipe line or storage tank to the credit of the lessee".
The first sentence of the fourth paragraph of section 11 of the Enabling Act, as amended, so far as applicable to the state school lands here involved provides that, "the proceeds from the sale and other permanent disposition of any of the said lands and from every part thereof, shall constitute permanent funds' for the support and maintenance of the public schools and the various state institutions for which the lands have been granted. ' '
R. C. M. 1947, sec. 81-901, in part, provides: "Lands which in the judgment of the board are likely to contain valuable deposits of coal, oil, oil shale, gas, phosphate, metals, sodium and, or other valuable mineral deposits, shall not be subject to sale, either the surface land or any of such deposits therein; provided, however, that this shall not be so construed as to prohibit the sale of lands containing sand, gravel, building-stone, brick clay or similar materials."
R. C. M. 1947, sec. 81-902, provides: "All coal, oil, oil shale, gas, phosphate,, sodium and other mineral deposits, except sand, gravel, building stone and brick clay, in lands belonging to the state of Montana, or which may hereafter become the property of the state, which have not already been reserved by the United States, are hereby reserved to the state. All such deposits are reserved from sale except upon a rental and royalty basis as provided by law. The state also reserves for itself and its lessees the right to enter upon such lands to prospect for, develop, mine and remove such deposits and to occupy and use so much of the surface of the said lands as may be required for all purposes reasonably extending to the exploring for, mining and removal of such deposits therefrom, but the lessee shall make just payment to the purchaser for all damage done by reason of such entry upon the land and the use and occupancy of the surface thereof."
In the second sentence of the fourth paragraph of section 11 of the Enabling Act as amended, Congress made clear its intention as to how rentals from leased lands should be employed by providing: "Rentals on leased lands shall be available for the maintenance and support of such schools and institutions." Emphasis supplied.
Original section 5 of Article XI of the Constitution of Montana as adopted by the constitutional convention and as ratified by the people in 1889 provided: "The interest on all invested school funds of the State, and all rents accruing from the leasing of any school lands, shall be apportioned to the several school districts of the State in proportion to the number of children and youths between the ages of six and twenty-one years, residing therein respectively, but no district shall be entitled to such distributive share that does not maintain a public free school for at least three months during the year for which distribution shall be made."
.Section 5 of Article XI, supra, was amended by Chapter 149, Laws of 1919, approved at the general election on November 2, 1920, and effective under the governor's proclamation December 6, 1920, and provides: "Ninety-five per centum (95%) of all the interest received on the school funds of the state, and ninety-five per centum (95%) of all rents received from the leasing of school lands and of all other income from the public school funds shall be apportioned annually to the several school districts of the state in proportion to the number of children and youths between the ages of six (6) and twenty-one (21) residing therein respectively, but no district shall be entitled to such distributive share that does not maintain a public free school for at least six months during the year for which such distribution is made. The remaining five per centum (5 %) of all the interest received on the school funds of the state, and the remaining five per centum (5%) of all the rents received from the leasing of school lands and of all other income from the public school funds, shall annually be added to the public school funds of the state and become and forever remain an inseparable and inviolable part thereof. ' '
"First Come, — First Served." At all times prior to January 1934 the state board of land commissioners issued all its oil and gas leases upon a "first come, — first served" basis. Under this policy the first qualified applicant presenting his application for a lease got it. There was no advertising. There was no competitive bidding.
Following the enactment of Chapter 108, Laws of 1927, wherein the Legislature prescribed that the "minimum annual money rentals to be paid to the state for oil and gas leases shall be seventy-five cents (75^) for each acre of land leased", the board continued with its "first come, — first served" policy, acting simply upon the written application of the first qualified applicant who merely offered and paid the minimum price of 75(5 per acre in advance for rental for the first year and there after paid annually the same statutory minimum so long as his lease was in effect. Under such policy the state of Montana, the common school funds of the state, the pupils of those schools and the taxpayers of the state suffered. They were the losers. The oil industry was the gainer. The applicants for oil and gas leases never offered or paid and the state never received anything other than the minimum 75fí per acre rental. Thus did the school lands and school children of the state of Montana subsidize the oil industry.
Competitive Bidding. On January 22, 1934, at the time that Governor Frank H. Cooney, Secretary of State Sam W. Mitchell, Attorney General Raymond F. Nagle and Superintendent of Public Instruction Elizabeth Ireland, comprised the state board of land commissioners, said board, by resolution, adopted the policy of advertising oil and gas leases and calling for competitive bids thereon. The board's resolution establishing such policy, appearing at page 428 of the minutes of the land board of January 22, 1934, is as follows: "The board unanimously decided to issue no more original oil and gas leases on state lands without advertising the lands for which applications have been made in two issues of the Montana Oil Journal, published at Great Falls, Montana, the first publication to appear about 15 days before the date set for leasing and the leases to be awarded through competitive bidding. Exceptions from rule will be made in the case of applications for renewal of oil and gas leases in accordance with Section 15, Chapter 108, Laws of 1927, as amended by Chapter 171, Laws of 1933."
The above policy of the board so adopted has been followed at all times since and it is this policy alone that is responsible for placing in the state treasury all of the moneys and funds which, since February 5, 1953, have been the subject of controversy and dispute, — first in the legislative assembly and then in the courts.
Had it not been for the efficient, conscientious and businesslike administration of the state land department and the carrying out of the policy of competitive bidding so adopted by it in January 1934, all that the state would have received from the oil and gas leases issued on state school lands in the calendar year 1952 would have been the rentals computed on the minimum of 75‡ per acre per year. This would have produced the total sum of $640,270 and no other or greater amount.
Counsel for respondent have made various contentions herein some of which are most inconsistent. They contended: That the oil and gas leases issued on the school lands are not leases; that the transactions evidenced by written instruments labeled ' ' State of Montana Oil and Gas Lease ' ' are not lease transactions at all but that, in legal effect such transactions are sales; that any cash moneys paid out of pocket by the successful bidder for a state oil and gas lease that is in excess of the statutory minimum of 75‡ per acre are no part of the "annual rental" on the lease as is stated in the executed lease, but that all such moneys in excess of the 75‡ statutory minimum are either (1) "royalty," (2) "bonus" or (3) "the proceeds from the sale and other permanent disposition" of the particular school lands described in the lease. We find no merit in any of the above contentions so made.
The word "bonus" as used in connection with the state's oil and gas leases means and refers to the additional amount or premium actually paid or agreed to be paid to the lessee, over and above the "posted field price existing on the day such oil is run into any pipe line or storage tank to the credit of the lessee" as is stated in K>. G. M. 1947, sec. 81-1704, and also in paragraph 6 in the state's printed form of oil and gas lease. "Bonus" here means that and nothing more.
The word "royalty" originated in England, where it was used to designate the share in production received by the Grown from those to whom the right to work mines and quarries was granted; it consists of a share in the oil and gas produced under a lease as compensation.
The word "royalty" as used in connection with the state's oil and gas leases means and refers to the state's share in production to be received by the state only after oil has been dis covered and produced from the leased lands. Until there is production the state is entitled to no share in production. In other words, no production, — no royalty.
After production, then only do the royalty obligations arise and continue so long as production continues. Thus it is clear that "royalty" refers not to oil and gas in place, but to a share in the oil and gas produced and it is equally clear that the words "royalty" and "royalties" as used in our statutes governing the leasing for oil and gas of the state's school lands are not synonymous with, and that they do not include the words "rent," "rental," and "rentals."
In 2 Thornton Oil and Gas, Willis, sec. 363, p. 644, the author cautions that "care must be taken to distinguish between rent and royalty in connection with gas and oil leases. Kent is the term applied to the privilege given to bore for gas and oil and for delay in beginning operations; while royalty is a certain percentage of the oil after it is found, or so much per gas well developed." Emphasis supplied.
The word "rent" is derived from the Latin word reditus meaning a return. It is return or pay for the use of the landlord's premises. The word "rental" is commonly used as synonymous with "rent."
"Advance royaltiesIn its decision the district court held the 75$ per acre per year paid by lessees on the oil and gas lease to be "rental within the meaning of the statute and are to be distributed into the income fund of the school system" and then said that "it necessarily follows that the bonuses bid throughout the years are in the nature of advance royalties, are capital in their nature and properly belong in the permanent school fund."
The court was correct in holding that when a successful bidder pays the minimum of 75$ per acre for the first year's rental on his lease, the moneys so paid are rental and that such moneys are to be placed in the common school interest and income funds. However this same situation obtains whether the bid for the first year's rental be the minimum of 75$ or whether it be 80$ or $80 per acre. The amount of the successful bid does not alter or change the nature of the initial payment for it remains rental and is to be placed in the interest and income fund whether the bid be the low minimum of or whether it be the highest bid obtainable at a spirited competitive bidding.
So far as concerns state oil and gas leases on school lands under onr present laws there can be and there are no "advance royalties" or royalties of any other kind or character in advance of the actual production of oil and the running of such oil so produced into a pipe line or storage tank and the district court erred in holding to the contrary.
Accordingly the injunction is ordered dissolved, the judgment and order of the district court are reversed and the cause is remanded to the district court with directions to dismiss the action. Remittitur will issue forthwith.
MR. JUSTICE BOTTOMLY concurs.