Court Opinion

ID: 9673994
Source: CourtListenerOpinion
Date Created: 2023-08-24 04:21:41.152803+00
Date Added: 2024-06-11T18:16:24.484892
License: Public Domain

Griffin Smith, Chief Justice. Counsel for appellee McWilliams state the substance of the jurisdictional problem in this controversy when they assert that because their client is sole owner of the forty acres he may sue for cancellation of an oil and gas lease; and this may be done without bringing into the litigation non-participating royalty holders whose aggregate interests were 98/113ths. The trial court held that the royalty owners were not indispensable parties, since their concern was with oil [and gas] as such, in contradistinction to operations or plans pertaining to production, or use of the land from which such minerals might be taken and brought to the surface as merchantable commodities. In 1938 McWilliams and others who then owned the land executed an oil and gas lease to J. E. Childers on 80 acres in Columbia County. The primary period was ten years. Before the suit resulting in this appeal was filed McWilliams acquired the interests of those who were associated with him in 1938. Since legal descriptions are not important here, the two tracts will be referred to as the east forty, and the west forty. By assignment leasehold estates were created, with the result that in October, 1948, all of these leases were owned by Hassie Hunt Trust, subject to overriding royalties in favor of one individual and three oil companies, and by another whose interest is spoken of by appellee as “an oil payment.” Under permit issued in October, 1939, an oil well was drilled on the east forty at a cost of slightly more than $60,000. Since that time it has been producing sufficiently to come within the allowable fixed by the Arkansas Oil & Gas Commission. The original lease provided that it should remain in force after the ten year period if gas or oil should be produced. Early in 1940 a dry hole was drilled on the west forty at a cost approximately equal to expenditures for the producing well. If, in leasing the land in 1938, the two tracts had been treated separately through use of words from which the legal conclusion would attach that life of the grant of one forty did not depend upon development of the other, it might be argued that the explorations made in good faith in 1940 with consequent failure of production terminated the lease on that acreage when the primary period expired. But the -two forties are treated as a whole in the lease: ‘ ‘ The northwest quarter of the northwest quarter of section fifteen and the northeast quarter of the northeast' quarter of section sixteen, all in township eighteen south, range nineteen west, and containing eighty acres, more or less.” It follows that the producing well, prima facie, continued the lease on the full eighty acres, and the initial question is whether a court of equity had the right to entertain a petition by appellant for cancellation on the allegation that there had been a failure to reasonably develop the ivest forty, and to decree relief without consent of the royalty owners and in circumstances where they were not given an opportunity to be heard. Appellants concede that the dry hole on the west forty has been abandoned, but say the acreage has not. Because of the comparatively new technique in developing oil lands, and the ability of drillers to go deeper than formerly (while at the same time talcing care of shallow production) it is contended that abandonment is not implicit in the mere fact of prolonged failure to drill. We do not deal with merits of the petition for cancellation, but rest the decision upon equitable rights of the royalty holders to be heard. The point does not appear to have been decided by this court in litigation involving royalty owners situated as were those with whom we are dealing. In other jurisdictions where similar issues have been adjudicated results have sometimes been influenced by domestic statutes.- We assume — and the assumption presupposes that none of the parties here was actuated by ulterior motives —that in seeking cancellation the landowner did not intend to serve his own interest to the detriment of royalty owners. McWilliams relies upon words in the royalty deeds reserving to the grantor the exclusive right to lease in whole or in part “without interference or hindrance upon the part of the [royalty owners”]. He also assumes that the right to lease and the right to cancel and re-lease amount to the same thing. The original Chancery action was removed to Federal Court (El Dorado District) upon a showing of diversity of citizenship. McWilliams then amended his complaint by alleging interests of the royalty holders and petitioning that they be made parties. Judge Miller ruled that this had the effect of destroying complete diversity, hence he sent the cause back to Chancery. It was Judge Miller’s belief that the royalty holders were indispensable parties, and- the record shows that their addresses were known to the plaintiff. Because of these facts class or virtual representation is not involved, the essential knowledge having been shown. A Federal case bearing upon issue similar to those raised by appellants here is Calcote v. Texas Pac. Coal & Oil Co., (Fifth Circuit) 157 Fed. 2d 216. While the question involving jurisdiction based on diversity of citizenship is extensively discussed, the opinion on rehearing closes with these statements: “. . . These royalty grantees had separate and distinct vested mineral interests, which would necessarily be prejudicially affected by confirmation as well as cancellation of the lease. . . .” The Court then quoted from Mallow v. Hinde, 12 Wheat. 193, 198, 6 L. Ed. 599, where a jurisdictional question was being considered. Said Mr. Justice Trimble: “We [put this case upon a ground much broader than that of jurisdiction] which must equally apply to all courts of equity, whatever may be their structure or jurisdiction. We put it on the ground that no court can adjudicate directly upon a person’s rights without the party being either actually or constructively before the Court.” The Supreme Court of Kansas, Thiessen v. Weber, 278 Pac. 770, held that failure of certain royalty grantees to- be joined in a suit to cancel leasehold rights did not prevent action by other owners. But the persons who complained of the lower Court’s dismissal for non-joinder of necessary parties were asked to join in the suit. When they declined to do so they were made defendants. The appellate Court said that the unwillingness of one or more of those holding royalty interests to permit cancellation did not prevent others from maintaining the action “to the extent of his interest.” In Matthews v. Landowners Oil Ass’n, opinion by the Texas Court of Civil Appeals, (Amarillo District) 204 S. W. 2d 647, it was held that oil and gas lessors and their assigns were necessary parties to a suit to cancel leases involving a pool of lessors’ interests in royalties arising from production on any of the land included in the pool, the alternative contention being that the leases created a trust with the lessee as trustee, so as to render a lessee the only necessary party. Numerous facts distinguish the case from the litigation at bar. However, the opinion contains this expression: “In a suit to cancel a written instrument all persons whose rights or relations with the subject-matter of the suit will be or might be affected by cancellation, are necessary parties.” Judge John E. Miller, Alphin v. Gulf Refining Co., 39 Fed. Supp. 570, cites Prof. Summers’ text on Oil and Gras v. 3, § 514, Permanent Edition, where undivided shares in royalty interests are mentioned. The Supreme Court of Texas, Shell Oil Co. v. Howth, 159 S. W. 2d 483, in passing on an oil and gas controversy used this expression: “Furthermore, it appears that after Howth executed the lease to the Shell Company he conveyed a part [of his royalty interest] to other parties. These vendees were not made parties to the suit. They were necessary parties to the action to cancel the original lease. ’ ’ The Court cited Sharpe v. Landowners Oil Ass’n, 92 S. W. 2d 435, 127 Tex. 147. In the Sharp case it was said: “It is settled beyond all question in this state that in a suit to cancel a written instrument all persons whose rig’hts, interests, or relations with or through the subject-matter of the suit will be affected, are necessary parties.” Arkansas Statutes, § 27-814-15 (§§ 36-37 of the Civil Code) were construed for this Court by Mr. Justice Battle in 1886. An excerpt from the opinion is: “From these provisions of the statute it is clear that it is within the discretion of the court, in an action for the recovery of real or personal property, to order any person having an interest in the property to be made a party when he applies and asks that it be done. But this discretion is limited to the right to determine the controversy between the parties already before the court. The obvious intention of the statute is to require all persons to be made parties to an action who will be necessarily and materially affected by its result, and to forbid the court from determining any controversy between; the parties before it when it cannot be done without prejudice to the rights of others, or by saving their rights. In such cases it is the duty of the court to allow such persons to be made parties, to the end that they may protect their' interests.” Smith v. Moore, 49 Ark. 100, 4 S. W. 282. The decree authorizing McWilliams to cancel the lease contains a provision that it shall not affect the rights, if any, of the non-participating royalty owners . . . “in the [west forty”]. Unfortunately cancellation of itself affected the holders of these interests, for the decree cleared the way for the landowner to contract anew. This later lease may or it may not be advantageous to the old royalty grantees; but the fact remains that their rights to oil and g’as taken from property under a lease existing when the royalties were conveyed were destroyed as to that lease, and this was done while they were legally absent. This does not mean that, as to nonparticipating royalty owners, they would have to be consulted in circumstances where a new lease could be legally negotiated. It is conceivable (though not suggested in this case) that collusive action between lessor and lessee could so adversely affect royalty grantees as to destroy or impair their property rights. Our conclusion is that adjudication without giving the absent interests an opportunity to be heard was improper, hence the decree must be reversed. The cause is remanded for a new trial. Mr. Justice McFaddin and Mr. Justice Millwee dissent.