Title: SCHLEGEL v MOORHEAD
Citation: N/A
Docket Number: 13198
State: Montana
Issuer: Montana Supreme Court
Date: August 30, 1976

No. 13198 I N T H E SUPREME C O U R T O F THE STATE OF M O N T A N A 19 7 6 E. P. SCHLEGEL, P l a i n t i f f and Appellant, S H E R M A N MOORHEAD and ROSELLE MOORHEAD, husband and wife, Defendants and Respondents. Appeal from: D i s t r i c t Court of t h e Ninth J u d i c i a l D i s t r i c t , Honorable B. W. Thomas, Judge presiding. Counsel of Record: For Appellant : Smith, Emmons, B a i l l i e and Walsh, Great F a l l s , Montana Robert J. Emmons argued, Great F a l l s , Montana For Respondents: Frisbee and Moore, Cut Bank, Montana John P. Moore argued, Cut Bank, Montana Submitted: June 2, 1976 Decided : AUGbq& 1,c-~6 F i l e d : g v g ;q-J (:?e , *i M r . J u s t i c e John Conway Harrison d e l i v e r e d t h e Opinion of t h e Court. P l a i n t i f f appeals from t h e judgment of t h e d i s t r i c t c o u r t dismissing h i s complaint f o r s p e c i f i c performance of a n option t o purchase a f e d e r a l o i l and gas lease from t h e de- fendant. The p e r t i n e n t f a c t s are set f o r t h a s shown by t h e d i s - t r i c t c o u r t findings of f a c t and t h e record. Defendant Sherman Moorhead has been t h e owner s i n c e 1956 of f e d e r a l o i l and g a s l e a s e number 073 151 ( a ) , c o n s i s t i n g of 120 acres i n Glacier County, Montana. H e acquired t h e l e a s e f o r salvage and has maintained only one producing well on t h e acreage. Said w e l l has not produced s u f f i c i e n t revenue t o pay t h e annual r o y a l t y . A t a l l t i m e s p e r t i n e n t hereto Moorhead employed a pumper who operated t h e well. Moorhead worked i n t h e o i l f i e l d s i n Glacier County from 1937 t o 1964 and i s f a m i l i a r with o i l f i e l d operations and terms. H e has l i t t l e experience with t h e business end of o i l operations, and no previous experience with options. Within t h r e e y e a r s of t h e t i m e of t h e option i n d i s p u t e here, he twice attempted t o sell t h e lease with no success. A t no t i m e r e l e v a n t t o t h i s c a s e d i d he make any e f f o r t t o l e a r n of o i l f i e l d developments i n t h e v i c i n i t y of h i s l e a s e by making i n q u i r i e s of h i s pumper, h i s a t t o r n e y i n t h e a r e a , o r t h e public records a t t h e O i l and G a s Commission o f f i c e i n Shelby, Montana. Moorhead l i v e d i n Butte, Montana from 1964 t o t h e t i m e of t h i s lawsuit. P l a i n t i f f Schlegel i s a United S t a t e s c i t i z e n who l i v e d i n Calgary, Alberta, Canada from 1952 t o 1973. H e has been en- gaged i n o i l f i e l d s a s a roughneck, has sold real e s t a t e , and has bought and sold o i l l e a s e s . H e decided t o leave Canada i n 1973 due t o h i s d i s s a t i s f a c t i o n with Canadian p o l i t i c s , and re- solved t o engage i n t h e o i l business i n Montana. I n November 1973, Schlegel v i s i t e d t h e O i l and G a s Commission o f f i c e s i n Shelby, Montana and m e t a g e o l o g i s t . The g e o l o g i s t recommended Township 37 N , Range 5 W a s an a r e a t o review f o r p o s s i b l e lease o p p o r t u n i t i e s . This township is where Moorhead's l e a s e i s located. From t h e public records i n t h e Shelby o f f i c e of t h e O i l and Gas Commission Schlegel learned t h a t most of t h e acreage i n t h a t a r e a was held by Union O i l . Union O i l declined t o farm o u t any acreage t o Schlegel. From h i s review of t h e records, Schlegel became aware of t h e l e a s e held by Moorhead. Schlegel learned from h i s examination of t h e public records a t Shelby t h a t Union O i l r e c e n t l y had brought i n a w e l l designated a s "Kruger 4E13", and t h a t t h e well was capable of producing o i l and gas i n commercial q u a n t i t i e s . H e a l s o learned t h e f i g u r e s reported f o r t h e e a r l y s t a g e s of o i l and gas flow, t h a t t h e w e l l w a s located on acreage adjoining land covered by t h e Moorhead l e a s e , and t h a t Union O i l had located another d r i l l - ing s i t e , known as "Kruger 5E13", a l s o on land adjacent t o t h e Moorhead l e a s e . O n a d a t e p r i o r t o January 12, 1974, Schlegel made a telephone c a l l t o Moorhead and asked him whether he w a s i n t e r e s t e d i n s e l l i n g h i s l e a s e . Moorhead r e p l i e d t h a t he was, and set a p r i c e of $5,000. Three subsequent telephone c a l l s by Schlegel t o Moorhead e s t a b l i s h e d f u r t h e r information about t h e l e a s e , and set t h e purchase p r i c e a t $5,000 provided t h a t Moorhead g i v e Schlegel a 90-day option t o purchase f o r a $100 consideration. O n January 18, 1974, Schlegel c a l l e d Moorhead and advised him t h a t he had prepared t h e option and would come t o Butte t o meet Moorhead on t h e following day t o c l o s e t h e d e a l . Moorhead agreed. O n January 19, 1974, Schlegel and h i s wife m e t with Moorhead a t a motel i n Butte. Schlegel brought with him a form of option agreement which he had prepared. Moorhead then read over t h e option. There was no f u r t h e r discussion of t h e t e r m s of t h e option, b u t i n t h e course of conversation Moorhead asked Schlegel why he was i n t e r e s t e d i n t h e l e a s e and Schlegel re- p l i e d t h a t he had a general i n t e r e s t i n t h e a r e a and had become d i s s a t i s f i e d with t h e p o l i t i c a l s i t u a t i o n i n Canada. Schlegel d i d not then o r a t any t i m e t e l l Moorhead of t h e information which Schlegel had obtained r e l a t i v e t o t h e w e l l Kruger 4E13 o r t h e l o c a t i o n of Kruger 5E13, both on land adjoining land covered by t h e Moorhead l e a s e . The option w a s signed by t h e p a r t i e s i n t h e presence of a signing witness. Moorhead accepted from Schlegel a d r a f t f o r $100 a s payment of t h e option consideration. Thereafter, on two occasions w i t h i n t h e option period, Schlegel accepted and exercised t h e option t o purchase Moorhead's l e a s e and tendered $4,900 t o Moorhead a s payment t h e r e f o r . Moor- head refused t h e tender and refused t o c a r r y o u t t h e option on both occasions. Schlegel sued f o r s p e c i f i c performance of t h e option t o purchase t h e o i l and gas l e a s e . Moorheads answered and counter- claimed f o r : (1) c a n c e l l a t i o n o r r e s c i s s i o n of t h e option on t h e ground of fraud; ( 2 ) damages of $5,000 f o r slander of t i t l e ; and (3) a c t u a l damages and exemplary damages f o r fraud, t o t a l l i n g $56,000. The d i s t r i c t c o u r t of t h e n i n t h j u d i c i a l d i s t r i c t , sit- t i n g without a jury, Honorable B. W. Thomas presiding, concluded a s a matter of l a w t h a t n e i t h e r p l a i n t i f f nor defendant-counter- claimants w e r e e n t i t l e d t o t h e r e l i e f prayed f o r . Judgment was entered i n favor of defendants a g a i n s t p l a i n t i f f ' s complaint; t h e complaint was dismissed; and judgment was entered i n favor of p l a i n t i f f s a g a i n s t defendants' counterclaim. Only t h e plain- t i f f Schlegel appeals from t h e judgments of t h e d i s t r i c t court. The i s s u e s on appeal a r e : 1. Did t h e d i s t r i c t c o u r t err i n r e f u s i n g s p e c i f i c performance of t h e option on t h e ground t h a t Schlegel f a i l e d t o inform Moorhead of t h e existence and l o c a t i o n of t h e Kruger w e l l s 4E13 and 5E13? 2. Did t h e d i s t r i c t c o u r t err i n refusing s p e c i f i c performance of t h e option on t h e ground of inadequacy of con- s i d e r a t i o n ? 3 . Did t h e d i s t r i c t c o u r t err i n considering t h e testi- mony of defendants' expert witness? W e preface our discussion of t h e i s s u e s with a statement of t h e r u l e enunciated i n I n t e r i o r S e c u r i t i e s Co. v. Campbell, 55 Mont. 459, 470, 178 P. 582: "A decree f o r s p e c i f i c performance is not granted as a matter of a b s t r a c t r i g h t , but i n every i n s t a n c e t h e a p p l i c a t i o n f o r such r e l i e f is addressed t o t h e sound, l e g a l d i s c r e t i o n of t h e c o u r t . * * * The case comes within t h e general r u l e , o f t e n adverted t o by t h i s c o u r t , t h a t i n t h e absence of a clear showing of abuse of d i s c r e t i o n t h e decision of t h e lower c o u r t w i l l be affirmed." See a l s o : Babcock v. Engel, 58 Mont. 597, 194 P. 137. The focus of S c h l e g e l ' s assignments of e r r o r is upon t h e d i s t r i c t c o u r t ' s f i n d i n g of f a c t No. 25 and conclusion of l a w No. 3 . The former reads: "25. Enforcement of t h e option agreement would be u n j u s t and unreasonable a s t o Moorhead because of ( a ) t h e inadequacy of t h e consideration, and, (b) t h e f a i l u r e of Schlegel t o f u l l y and candidly inform Moorhead of t h e completion of Kruger well 4E13 and t h e l o c a t i o n of Kruger 5E13 when he re- p l i e d t o Moorhead's January 19th i n q u i r y a s t o why he was i n t e r e s t e d i n t h e l e a s e . " Conclusions of l a w No. 3 i s s i m i l a r , omitting t h e words " f u l l y and candidly". It i s c l e a r t h a t s a i d f i n d i n g and conclusion a r e based upon s e c t i o n 17-808, R.C.M. 1947, which states i n r e l e v a n t p a r t : "What p a r t i e s cannot be compelled t o perform. S p e c i f i c performance cannot be enforced a g a i n s t a p a r t y t o a c o n t r a c t i n any of t h e following cases: "1. I f he has n o t received an adequate consid- e r a t i o n f o r t h e c o n t r a c t ; "2. I f it is not, a s t o him, j u s t and reasonable; " 3 . I f h i s a s s e n t w a s obtained by t h e misrepresen- t a t i o n s , concealment, circumvention, o r u n f a i r p r a c t i c e s of any p a r t y t o whom performance would become due under t h e c o n t r a c t * * *." A s t o t h e f i r s t i s s u e , Schlegel contends t h a t t h e option t r a n s a c t i o n w a s a t arms length and t h e r e was no duty upon him t o d i s c l o s e t o Moorhead h i s knowledge gained from public records which were equally a c c e s s i b l e t o Moorhead. On t h e o t h e r hand, Moorhead argues t h a t Schlegel is g u i l t y of a multitude of f r a u d s , a p o s i t i o n which was r e j e c t e d by t h e d i s t r i c t court. However, our t a s k i s t o determine whether t h e d i s t r i c t c o u r t abused i t s d i s c r e t i o n i n refusing s p e c i f i c performance, and we need n o t r e s o l v e t h e c o n f l i c t i n g arguments of t h e p a r t i e s concerning a c t u a l and c o n s t r u c t i v e fraud and t h e l i k e . It i s undisputed t h a t Schlegel w a s aware of t h e Kruger w e l l s on January 19, 1974, and of t h e f a c t t h a t they had sub- s t a n t i a l production p o t e n t i a l . It is a l s o e s t a b l i s h e d t h a t when asked "why" he w a s i n t e r e s t e d i n Moorhead's l e a s e , Schlegel s a i d he had a "general" i n t e r e s t i n t h e a r e a . The question is not whether S c h l e g e l ' s answer was fraudulent o r n o t , but whether Moorhead's a s s e n t w a s obtained by t h e "misrepresentations, con- cealment, circumvention, o r u n f a i r p r a c t i c e s " of Schlegel. Sec- t i o n 17-808(3), R.C.M. 1947. This d i s t i n c t i o n i s s i g n i f i c a n t be- cause under s e c t i o n 17-808 a c o u r t i n e q u i t y has f a r more l a t i t u d e i n assessing t h e conduct of t h e p a r t i e s before it than does a c o u r t determining t h e l e g a l elements of fraud. A s s t a t e d i n I n t e r i o r S e c u r i t i e s , supra: " * * * To secure t h e d e s i r e d r e l i e f [ s p e c i f i c performance] i n t h i s i n s t a n c e , a p p e l l a n t s w e r e required to come into court with clean hands and with a cause whose ethical qualities were such as to commend it to the conscience of the chancellor. * * *" The district court specifically found that Schlegel did not affirmatively misrepresent a lack of development in the area, and this finding is not challenged here. However, it is not necessarily inconsistent for the district court to hold that enforcement against Moorhead would be unjust and unreason- able due to Schlegel's concealment or circumvention in answer to Moorhead's question. In short, we do not find an abuse of discretion on this point. The second issue concerns the inadequacy of the consid- eration. Section 17-808(1) makes this factor a defense to an action for specific performance of contract. Babcock v. Engel, 58 Mont. 597, 194 P. 137. The district court made no finding as to the specific value of the lease, and Schlegel argues that therefore it cannot properly find, as it did in finding of fact No. 24, that the "option price of $5,000.00 was disproportionate to the real value of the lease in the light of information avail- able from public records on January 19, 1974." We cannot agree with Schlegel's contention. There is ample evidence in the record to show that the Kruger 4E13 and 5E13 wells were in close proximity to Moorhead's lease and were anticipated to be put into commercial production. Kruger 4E13 was shown to have produced substantial quantities of oil, and for the reasons appearing hereafter, it was sufficient to support the findings. The final issue is whether Moorhead's expert witness' testimony should have been considered by the district court. Virgil Chamberlain testified for the Moorheads on the value of the Moorhead lease. His testimony was founded upon his own extensive knowledge and experience in the area, and upon the public records of the production of the nearby Kruger 4E13 well. The objections to this testimony were overruled as to admissi- bility, but the testimony was weighed in light of the grounds for the objections. Schlegel's assignment of error on this point is related to the second issue, inadequacy of consideration. He argues that Chamberlain's value estimate of over one million dollars is so speculative and inaccurate as to vitiate the district court's finding No. 24 that $5,000 was disproportionate to the value of the lease. However, the district court did not speci- fically refer in its findings on consideration to the valuation given by Chamberlain. Furthermore, as was pointed out in our discussion of the second issue, there is evidence to sustain the district court's finding of inadequacy of consideration in- dependently of Chamberlain's testimony. Therefore, assuming any error in the admission of said testimony, it is harmless and cannot be the basis of a reversal on appeal. Cf. Benner v. B. F. Goodrich Co., 150 Mont. 97, 430 P.2d 648. In view of the foregoing, we hold that the district court did not abuse its discretion by refusing to grant to Schlegel specific performance of the option to purchase Moorhead's oil and gas lease. The judgment of the istrict court is affirmed. P\ +*& ---------- ---------------- Justice We concur: 4-4c-%!?4 -------- - Hon. Edward T. Dussault, district judge, sitting in place of Mr. Chief Justice James T. Harrison.