Title: EXETER EXPLORATION CO v FITZPATRI
Citation: N/A
Docket Number: 81-234
State: Montana
Issuer: Montana Supreme Court
Date: January 20, 1983

No. 81-234 IN THE SUPREME COURT OF THE STATE OF MONTANA EXETER EXPLORATION COMPANY et al., Plaintiffs and Respondents, vs. J. W. FITZPATRICK, et al., Defendants and Appellants. Appeal from: District Court of the Sixteenth Judicial District, In and for the County of Rosebud Honorable A. B. Martin, Judge presiding. Counsel of Record: For Appellants: Moulton, Bellingham, Lonqo and Matther, Billings, Montana William H. Bellingham argued, Billinqs, Montana For Respondents: Sandal1 and Cavan, Billings, Montana James L. Sandal1 argued, Billings, Montana McNamer, Thompson & Cashmore, Billings, Montana For Amicus Curiae: Walter W. Sanders, Houston, Texas Submitted: September 9, 1982 Decided: January 20, 1983 J A l v 2 0 1983 Filed: M r . Justice Daniel J . Shea delivered the Opinion of the Court. Defendants, J. W . Fitzpatrick, et a l . appeal from a judgment of the Rosebud County District Court quieting title to the working interest in an oil a n d gas lease i n favor of plaintiffs, Exeter, et a l . and defendant, Younghlccd. The dispute stems from an assignment mde in 1969 b y J . W . Fitzpatrick of certain portions o f his interest i n an oil a n d gas lease. The assignment was part of a plan of Fitzpatrick's to liquidate a family corporation. The assignees were himself, his wife a n d four trusts which he had established for his children. Exeter brought this quiet title action to determine whether the four trusts own a working interest or an overriding royalty interest in the lease. The workinq interest claimed by the trusts is more valuable: the m u n t due the four Fitzpatrick trusts as working interest owners on production through April 1980 would be $202,709.86; the amount which would be due them as owners of an overriding royalty interest for the same period would be $18,084.49. The trial court ruled that the trusts o w n only overriding royalty interests, a n d also ruled that the trusts were not entitled to interest on the amounts withheld pending the outcom of litigation. We reverse a n d remand for entry of judgment in favor of J. W . Fitzpatrick, et a l . Fitzpatrick, et a l . raise four issues. First they contend that the 1969 assignment to the trusts was a gift and that the txial court erred in ruling that the gift failed for lack of delivery and lack of acceptance, and because J . W . Fitzpatxick retained dominion and control over the working interest. Second, they argue that the trial court erred in ruling that even i f the gift was valid, nonetheless, J . Lee Youngblmd had a right to notice i n writing of that assignmeat a n d that no such notice was given. They argue that Youngblmd had constructive notice of the assignment, which was sufficient. Third, they argue that the trial court erred in ruling that in any evemt Youngblood h a d a right to acquire the working interest by specifically e i a f o r c i n g a preferential right of purchase against the Fitzpatrick trusts. They contend that the preferential purchase right is not applicable to a gratuitous transfer to a family member and that J. Lee Youngblood waited too long to exercise the right. The fourth and final issue does not go to the merits of the lawsuit, rather the four Fitzpatrick trusts claim that regardless of the nature of their ownership, they are entitled to interest on any money owed to them which has been held in suspense pending the outcome of this suit. The oil and gas lease is on land in Rosebud County. In 1968, the working interest in the lease was co-omd by four parties: J. W . Fitzpa-trick, L . S . Youngblood, Natural Gas and Oil Company, and Continent.al Oil Company. The exact percentage owned by each party has no haring on this appeal. The interests are subject to the terms of an operating agreement signed by the parties on April 29, 1954, and recorded. The agreemt included a clause giving each party a preferential right to purchase the working interest of any other party. On September 27, 1968, J . W . Fitzpatrick created four tvusts at the Wyoming National Bank of Casper, one for each of his four children. He conveyed various assets to the trusts as part of a plan to liquidate his business holdings for estate planning purposes. The disputed assignmmt occurred on June 22, 1969 when J . W . Fitzpatrick divided his working interest i n + _ h e lease a n d assigned approximately one-third to his wife, approximately one-third in equal shares to the four trusts, and reserved one-third to himself. This lease was only one of several items J. W . Fitzpatrick included i n the 1969 a s s i - t . The trial court held only that the assignment to the trusts of the working interest in that particular lease was invalid. In 1967, J. Lee Youngblood acquired a working interest in the lease from his brother, L. S. Youngblood, w h o had been one of the original parties to the 1954 operating agreement. J. Lee Youngblood sought to acquire the rest of the outstanding working interests. On M a y 26, 1972, J. W. Fitzpatrick, Natural Gas and O i l Company and Continental O i l Conpany a l l signed a quitclaim assignment of whatever working interest they had to J. Lee Youngblood. After obtaining these assignmints, J. Lee Youngblood believed that he owned 100 percent of the working interest in the lease. H e then contracted with meter Exploration Corpany e t al. to explore and develop oil. and gas wells on the land. Ownership or control of 100 percent of the working interest i n an oil and gas lease is necessary as a basis for exploration and developnent. Developwnt was successful and the lands became productive in 1972. In this suit, Youngblood contends that by the 1972 assignment, he acquired a l l of the working interest which J. W. Fitzpatrick had ever owned in the lease. The Fitzpatrick trusts on the other hand contend that they have a superior claim to the portion of the working interest which had been assigned to them in 1969. Therefore the trusts argue that by the 1972 assignment Youngblood acquired only the one-third working interest which J. W. Fitzpatrick had reserved to himself in the 1969 assignment. In 1975, Yo~,mgblood began to doubt whether he had acquired a l l of J. W. Fitzpatrick's original working interest. Therefore, a t Youngblood's insistence, J. W. Fitzpatrick and his wife both signed letters to ratify that Youngblood had acquired a l l of their working interest in 1972. However, the four Fitzpatrick children as beneficiaries of the trusts which J . W. Fitzpatrick created in 1968, refused a request from Youngblood t o sign similar letters indicatinq that they had no claim t o the working interest in the lease. The f i r s t question is, of course, whether the 1969 assignment t o the trusts was valid. If so, Youngblood argues that he n.onetheless had a right t o exercise the preferential purchase right contained i n the 1954 operating agreement. This agreement gave ea.ch party a preferential right t o purchase the working interest of another party upon meting the terms offered a purchaser. J. W. Fitzpatrick's assignroents t o his childrens' trusts were gifts. In effect, Youngblood claims that the preferential purchase clause requires that before J. W. Fitzpatrick could give his working interest as a g i f t t o his children, he f i r s t should have offered it as a g i f t t o Youngblood. The t r i a l court concluded that the 1969 assignment was inva.lid for the failure of delivery, failure of acceptance and for retention of dominion and control over the working interest by J. W. Fitzpatrick. W e hold. that the 1969 a.ssignment t o the trusts was valid; that delivery was sufficient, that the trusts accepted the assignment and that J. W. Fitzpatrick's involvement with. the lorking interest did not constitute an exercise of dominion and control over the working interest. DELIVERY AND ACCEPTANCE In 1929, we held that actual o r symbolic delivery is not necessary t o complete a g i f t effectuated by an instrument i n writing. Sylvain, et al. v. Page (1929), 84 Mont. 424, 276 P. 16. J . W. Fitzpatrick executed and recorded the 1969 assignmnt. The t r i a l court found that J. W. Fitzpatrick's intent in making the assignment was t o transfer income from o i l and gas production t o his wife and t o the four trusts for his children. W e therefore conclude that delivery was complete. W e have no doubt, furthermore, that the trusts accepted the 1969 assignment. Acceptance is presumed i f a gratuitous a s s i p ~ z t is beneficial t o the assignee. 6 Arn.Jur.2d Assignments S 93. The t r i a l court noted that there was no production on the land in 1969 and the assigmwnt of the lease was therefore not beneficial t o the tmsts. Howver, the 1969 assignment included other property, most of which generated inc-. In fact, the record shms that this lease was the only nonproducing lease included in the assignment, and the only one which did not generate income. It cannot be doubted that the net effect of the entire assignment was beneficial t o the trusts. As such, acceptance of the trusts is presmd. TXXilINION AND C O N T R O L The t r i a l court concluded tha.t J. W. Fitzpatrick continued to exercise dominion and control over the working interest. The t r i a l court relied on two factors in reaching this conclusion. First, for the years 1970-71 and 1971-72, J. W. Fitzpatrick paid the lease rentals on the subject lease. Second, in Novemlr 1969, J. F J . Fitzpatrick executed documents circulated by Continental O i l Company which showed him to be the owner of the working interest in va-rious 1-eases which had been included in the 1969 assignments t o the trusts. This evidence is insufficient t o support a conclusion that J. W. Fitzpatrick retained dcaninion and control over the working interests assigned t o the trusts. The total amount J. W. Fitzpatrick paid for the lease rentals for both years was less than $50, yet the value of the disputed working interest w a s over $200,000. When conpared with the value of the working interest, the lease rental papent is inconsequentia.1. Although J. W. Fitzpatrick was not reimbursed, the evidence suggests that the paymmts might have been inadvertent. J. W. Fitzpatrick had extensive o i l and gas holdings and in 1969 had retained a p r t i o n of the working interest i n the lease. H i s signature on the documer~ts circulated by Continental Oil Company came onlv a few mnths after the 1969 assignment. These two isolated incidents, are insufficient to show the exercise of dominion a n d control, particularly i n view of the fact that although expl.oration and developnent of the oil a n d gas was taking place, nothing i n the record suggests that J. W . Fitzpatrick played any role i n the developrent or production under the lease. We therefore hold that there is not sufficient evidence that J . W . Fitzpatrick retained d c a n i n i o n and control over the working interests which he had assigned to the trusts. PREFERENTIAL PURCHASE We turn next to Youngblood's al-ternative claim that even i f the 1 - 9 6 9 assignment was valid, he is entitled to enforce the preferential purchase clause in the 1954 operating agreement. That clause provides : "In the event any party hereto desires to -- sell or assign any of its or his interest . . . such party shall promptly c m i c a t e by notice i n writing to the other ~arties . . . the terms and conditions upon which it or he is willing to transfer - and assign the interests involved and the other parties, or any of them, shall, for a period o f ten (10) days after receipt of such notice, have an option to purchase such interest on the terms a n d conditionFcontained . i n such notice . . . " (Fkphasis added. ) The Fitzpatrick trusts argue that Youngblocd's right to notice was satisfied by constructive notice when J. W . Fitzpatrick recorded the 1969 a.ssignment. But Youngbld urges a literal interpretation of the preferential purchase clause and contends that he was entitled to notice i n writing. We agree with Youngblood that constructj-ve notice does not satisfy the requirement of notice in writing. However, Youngblood had actual knowledge of the assicpwnt at least 1 5 mnths before he notified J . W . Fitzpatrick and the four Fitzpatrick trusts that he intended to exercise his preferential purchase right. The trial court found, and it is not disputed, that Youngblood h a d actual knowledge o f the 1969 assignment i n December 1975 when he was shown a copy of the assignment b y his employee, Lloyd Terry. WE? note that the disputed 1969 assignment to the trusts was drafted b y the same J~lovd Terry, who was also at that t h an employee of J . Iee Youngblood. The preferential purchase clause is not open-ended; rather, a party desiring to exercise the right must give notice of his intent within ten days. Nonetheless, Youngblood waited until March 14, 1977, some 15 mnths later, t o notify J. W . Fitzpatrick and the four Fitzpatrick trusts of his intent t o exercise his preferential right. Youngblood has sham no excuse for waiting 15 months to exercise the preferential purchase right. Nor are we satisfied that the parties clearly intended the preferential purchase clause to apply t c ? a transfer without consideration between family & r s . The Fitzpatrick trusts argued at the trial level and argue here that the clause does not clearly spxify the events which will trigger the preferential right. The trial court failed to address this issue. The words used in the clause include "sell or assign," "transfer and assign," or simply "assign." Interchangeable use of the words creates ambiguity as to the parties' intent. Section 28-3-501, PIICA, provides that unless the parties intend otherwise, words of a contract are to be understood in their ordinary and popular sense rather than according to their technical legal meaning. Because the words setting forth the events which trigger the preferential purchase riqht are used interchangeably, we do not believe the parties intended the words to be understood in the technical legal sense. The preferential right is referred to as a preferential purchase right; the right gives a party ". . . an option to purchase . . ." (Emphasis added.) The word purchase leads us to believe that the parties intended the preferential purchase clause to apply only to a transfer for consideration. The clause was not intended to prevent a party frcm transferring his interest to members of his family as a gift unless he first offered it as a gift to other parties to the 1954 operating agreement. Other evidence indicates an intent to exclude transfers to family wnbers. J. Iee Youngblood acquired his interest in the basic oil and gas lease b y assignment from his brother's estate in 1967. Neither the estate nor J. Iee Youngblood notified the other working interest owners of that transaction so that they might exercise their preferential purchase riqht as Youngblood seeks to exercise his in this case. Strong policy reasons exist in favor of a rule that purchase options should be strictly construed against t h e holder of the option. 11 Rocky Mtn. PG-neral Law Institute 35 (1966), Preferential Purchase Rights. We conclude that Youngblood has no valid claim to the working interest held b y the trusts. The fact that i n 1975, J . W . Fitzpatrick a n d his wife ratified that the 1972 assignment transferred their working interest to Youngblood does not adversely affect the interests of the four Fitzpatrick trusts. J. W . Fitzpatrick and his wife had both retained portions of the working interest in the 1969 assignment, which they were free to transfer. The 1-972 assignment to Youngblood did not transfer a specific interest but merely quitclahd whatever interest J . W . Fitzpatrick h a d . J. W . Fitzpatrick made no representation in the 1972 assignment to Youngblood which would make it i n c o m p a . t i b l e with the 1969 assignment to his childrens' trusts. Neither J. W. Fitzpatrick nor his wife received consideration from Youngblood for the 1972 assignment or for the ratifications in 1975. As a result of the ratifications, Youngblood owns the working interests of J. W . Fitzpatrick and of Fitzpatrick's wife for which Youngblood paid nothing. But w e cannot agree that Youngblood also has a right t o the working interests of the four Fitzpatri-ck trusts and t o pay nothing for them. INTEREST The trusts have not received m y of the proceeds from production under the lease. Payment has been suspended pending outcome of this suit. The t r i a l court held that no interest is due on amounts payable t o the four Fitzpatrick trusts. W e find no evidence of a written agreement among the parties disallowjng interest on suspended p a p a t s . W e hold that interest is payable a t the leqal rate on a l l amounts due the four Fitzpatrick trusts as working interest awners. The suspended payrents never did a n d could not have belonged. t o any other than the tuusts. Equitable principles require the payment of interest on those m u n t s . See: - Sterl-ing v. Marathon O i l Co. (Kan. 1978), 576 P.2d 635; Phillips Petroleum Co. v. Stah1 Petroleum Co. (Tex. 1978), 569 S.W.2d 480; Shutts v. Phillips Petroleum Co. (Kan. 1977), 567 P.2d 1292; Phillips Petroleum Co. v. Adams (5th C i r . 1975), 513 F.2d 355. W e reverse and direct the D i s t r i c t Court t o emter judgment for the appellants in accordance with this opinion. W e Concur: Frank I . Haswell