Britton v. Green

325 F.2d 377, 7 Fed. R. Serv. 2d 399

• Court: Court of Appeals for the Tenth Circuit
• Decided: November 29, 1963
• Docket: No. 7242
• Status: Published

Opinions

MURRAH, Chief Judge.

This is an interlocutory appeal, pursuant to 28 U.S.C. § 1292(a) (2), from an Order of the District Court appointing a Receiver for oil properties in Lincoln County, Oklahoma. The diversity suit, brought by Michigan citizens against citizens of Oklahoma, asserted two claims. The first is to the effect that the plaintiffs are the separate, legal and equitable owners of undivided fractional interests in two oil and gas leases in Lincoln County (known as the Hopkins and Rives Leases), under written agreements with Carroll W. Britton, wherein she, as owner of the leases, agreed to deliver to the “Purchaser” a specified undivided fractional interest in the leases, less any overriding royalty interest of record, and wherein she agreed to drill and complete a well on each of the leases and operate the same “to the mutual interest of all parties hereto, as economically as good business judgment will warrant;” that Britton and her husband did drill, or cause to be drilled, a well on each of the leases; and, that as authorized agents of the plaintiffs and other owners of undivided working interests, they violated their fiducial obligations to the plaintiffs, by failing to properly complete the wells and by misoperating and mismanaging both leases, to the irreparable damage of the plaintiffs. The prayer was for a temporary restraining order, enjoining the Brittons from continuing the operation of the leases, from removing or disposing of any of the property on either of the leases or any of their interest therein, for an accounting, and for the appointment of an operating Receiver.

The second claim is asserted only by plaintiff Mitchell. It alleges the execution of a promissory note in the amount of $20,000 to Mitchell, by defendant Fred Ballou, for and on behalf of himself and as the authorized agent of the Brittons and Rachel Jane Ballou, and the execution of a mortgage by the said Ballou, on behalf of himself and as agent for the Brittons and Rachel Jane Ballou, to secure the promissory note, covering an undivided one-fourth interest in both the Hopkins and Rives Leases. The claim alleged default in payment of the note, and the failure of the mortgagors to efficiently operate the oil and gas leases, to keep and maintain the mortgaged property in good state of repair, and to cure title defects as required by the mortgage. The prayer was for judgment on the note plus interest and attorney fees, foreclosure of the mortgage, and appointment of a Receiver to operate the oil and gas leases pendente lite, as provided by the terms of the mortgage.

Pursuant to notice and hearing, the Court specifically found that it had jurisdiction of the parties and the subject matter; that the Brittons had violated the contract with plaintiffs and had mismanaged and misoperated the oil and gas leases, resulting in waste and drainage of gas from the Hopkins Lease by off-set wells; and, that they had failed to operate the well on the Rives Lease and had removed the tanks therefrom, without accounting to the plaintiffs therefor. The Court further found that the note was in default more than one year; that the mortgagors had violated the terms of the mortgage by failing to keep and maintain the leases in good repair and efficiently operate them in a workmanlike manner, thus impairing the mortgagee’s security; and, that a Receiver should therefore be appointed for both oil and gas leases. A Receiver was appointed and ordered to take immediate possession of the leases and operate the same pursuant to Order of the Court.

Thereafter, the Brittons and the Ballous moved to dismiss the first claim, and to vacate the Order appointing the Receiver, alleging that when the suit was commenced, certain other named citizens of the State of Michigan were also owners of undivided fractional interests in both leasehold estates; that they are indispensable parties to the suit; and, that the Court was without authority to appoint a Receiver for their undivided interests in the properties in their absence. In their separate answer, the Brittons admitted the asserted respective interests of the plaintiffs in the oil and gas leases, subject to the right of Carroll W. Britton, under the agreements, to receive the proceeds of the oil and gas runs, and to be paid the expense of operating the oil and gas leases. The answer reiterated the indispensability of the non-party Michigan resident owners of undivided fractional interests in the same oil and gas leases, and alleged that their alignment as parties defendant in the suit would destroy requisite diversity of citizenship.

Answering the second claim, the Brittons admitted the execution of the note and mortgage, as attached to the complaint, but denied that either of the Brittons were personally liable on said note and stated in that connection that Carroll W. Britton was holding in trust an undivided one-fourth interest in the leasehold estate for the benefit of the mortgage, and that such one-fourth interest was subject to the mortgage.

The Ballous adopted the Brittons’ answer to the first claim. They also adopted the Brittons’ answer to the second claim, with respect to the note and mortgage, but specifically alleged that the provisions of the mortgage pertaining to appointment of the Receiver were inapplicable in this action, since the mortgage covered only a fractional undivided interest in the leasehold estate, the other interests being owned by persons not parties to the mortgage. Finally, Fred Ballou claimed credit for all payments on the note, and prayed that the mortgage be adjudged a lien only upon the interest held in trust by Carroll W. Britton, for the benefit of the mortgage.

The defendant Thompson answered, admitting the ownership of an undivided one-fourth interest in the Hopkins Lease, subject to an overriding interest of record. He admitted that the Hopkins Lease was being drained by wells on adjoining leases and that immediate action should be taken by the operator to sell the gas from the Lease. He had no objection to the Receivership, provided it was terminated early and its expense kept to a minimum.

On hearing for appointment of Receiver, the Court received in evidence the Journal Entry of a Judgment of the State District Court of Lincoln County, in a quiet title action by all of the parties to this suit and the other Michigan owners of undivided interests in the two oil and gas leases. The State Court Judgment purported to finally adjudicate the respective undivided interests of all the claimants in the Hopkins Lease, in the fractional proportions set out in the margin.¹ The State court proceedings did not involve the Rives Lease, but it seems to be agreed that all of the parties own approximately the same undivided fractional interest in that Lease. The State Court Judgment recited that the respective fractional interests of the Michigan residents, who are not parties to this suit, were held in trust by Carroll W. Britton. The undivided interests of all the parties are evidenced by the same form of agreement, under which Britton is designated as operator of the Leases, with the right to purchase the oil produced at the posted price, for the credit of the other interest holders, and with the duty to manage and operate the Leases for the mutual interest of all the leaseholders.² All of the fractional interest holders are thus co-tenants in the leasehold estates, subject to the separate but uniform operating agreements with Britton. See: Earp v. Mid-Continent Petroleum Corporation, 167 Okl. 86, 27 P.2d 855, 91 A.L.R. 188; Taylor v. Brindley, 10 Cir., 164 F.2d 235; Carter Oil Co. v. Crude Oil Co., 10 Cir., 201 F.2d 547; and Kuntz Law of Oil and Gas, Vol. 1, Ch. 5. It is on this operating agreement that the absent Michigan interest holders are said to be indispensable parties to a suit for appointment of a Receiver. The best of this argument is to the effect that by their agreements with Britton, they designated her as the operator of their leasehold estates, and the appointment of a Receiver, ousting her from operation of the leaseholds, is an unwarranted interference with their contract rights.

Before we reach the question of indispensability, we must heed the frequently stated admonition, “ * * * that a federal court of equity should not appoint a receiver where the appointment is not a remedy auxiliary to some primary relief which is sought and which equity may appropriately grant.” Kelleam v. Maryland Casualty Co., 312 U.S. 377, 381, 61 S.Ct. 595, 85 L.Ed. 899. And see: Pusey & Jones Co. v. Hanssen, 261 U.S. 491, 43 S.Ct. 454, 67 L.Ed. 763; and Inland Empire Insurance Co. v. Freed, 10 Cir., 239 F.2d 289. This is so, even though a State court, exercising concurrent jurisdiction, may have appropriately appointed a Receiver in the same circumstances. See: Pusey & Jones Co. v. Hanssen, ibid.; and Inland Empire Insurance Co. v. Freed, ibid. Cf. Cameron v. White, 128 Okl. 251, 262 P. 664. And see: Title 12 O.S. § 1551. The only purpose of the first claim is a conservatory Receivership, and it was improper, regardless of the indispensability of parties.

But, different considerations govern the propriety of the Receivership under the second claim by mortgagee Mitchell. He seeks judgment on the note and foreclosure of his mortgage, covering an undivided interest in both leasehold estates. By the terms of the mortgage, the mortgagor expressly agreed that in the event of a foreclosure suit, the mortgagee is entitled, “as a matter of right,” to the appointment of a Receiver to take possession and control of, operate, maintain and preserve the mortgaged property or any part thereof, and the mortgagor waived all notice of the filing and hearing of such application for appointment of Receiver, and irrevocably consented to an appointment made pursuant thereto.

There is complete diversity of citizenship between the present parties. The requisite amount in controversy is also apparent. Mitchell is thus clearly entitled to his Receiver and the motion to vacate was properly denied, unless the absent Michigan residents were indispensable parties to the foreclosure proceedings, or more specifically, to the ancillary appointment of the Receiver.

It is, indeed, an historical rule frequently stated for practical application, that if a Court with jurisdiction of the parties and the subject matter, cannot fully adjudicate the issues between the parties without injury or injustice to an interested and absent party, the suit should fail for indispensability. See: Shields v. Barrow, 17 How. 129, 58 U.S. 129, 15 L.Ed. 158; Carter Oil Co. v. Crude Oil Co., supra; Skelly Oil Co. v. Wickham, 10 Cir., 202 F.2d 442; Homestake Mining v. Mid-Continent Exploration, 10 Cir., 282 F.2d 787, 797; Federal Practice And Procedure, Barron and Holtzoff, Ch. 8, §§ 512, 513; and Moore’s Federal Practice, Vol. 3, § 19.07. The concept of indispensability is of ancient origin, probably born of dictum, but now matured into a generally accepted rule. It has been criticized as a “ghostly character which haunts the halls of justice, an apparition whose suggested existence stays the hands of the law.” Professor Hazard on Indispensable Party — Historical Origin Of A Procedural Phantom, 61 Col.Law Rev. 1254. Professor Hazard suggests that “there is no party whose absence prevents a decree. There are parties whose absence prevents a complete decree” and, “therein” he says, “lies the fallacy of the indispensability rule.” Ibid, p. 1282. In other words, a Court of equity should not refuse to act at all, simply because it cannot do complete justice in a given case. Another legal scholar would treat the rule as a “statement of policy, not unrelated to considerations of due process, in the light of which the court may seek to do maximum justice.” See: Professor Reed, 55 Mich.Law Rev. 327, 336. We think of the rule as a creature of equity jurisprudence and as a reliable and practical guide for the appropriate exercise of federal equity jurisdiction, in accordance with the fundamentals of due process.

In determining whether, in this case, the Court may appropriately exercise its equity jurisdiction without injury or injustice to the absent co-tenants, we must look to the legal relationship of the parties and to the nature of the relief sought. The absent co-tenants have no litigable interest in the mortgaged estate. Their interest in the leaseholds will not be affected by a final decree of foreclosure, and they are not, therefore, necessary parties to the ultimate relief sought. See: Holt v. King, 10 Cir., 250 F.2d 671, and cases cited, But, they do have a litigable interest in the operation of the oil and gas leases. As we have seen, they have contracted with Britton to operate their interests in the leaseholds and to account to them for the net proceeds. A Receivership is an interference with that contract, and due process dictates that they be heard in the proceedings for the appointment of a Receiver.

If Britton can be said to be the express trustee under the operating contract, she is, of course, the real party in interest to any suit involving her trusteeship, i. e., see: F.R.Civ.P., Rule 17(a). The appellees do not claim an express trusteeship, but they do insist that the operating contract had the effect of ereating a fiducial relationship between Britton and her co-tenants, with respect to the operation of the cotenancy, at least to the extent that she became the operating agent or trustee; that in such capacity she stood as the representative of the absent co-tenants in all matters respecting the operation of the property, including this suit for her removal; and, that notice to her in this suit was, therefore, constructive notice to the absent co-tenants. The appellants deny any trust relationship under the operating contract, or that Britton stood in a representative capacity with respect to this litigation. In that connection, they chailenge the validity of that part of the State Court Judgment which recites that the fractional interests of the absent Michigan residents are held in trust by Britton, and offered the pleadings to show that the trust relationship was not an issue in that case. The trial Court took the State Court Judgment on its face, and we think very properly so, but that Judgment covered only the interests of the absent parties in one of the mortgaged leases. Quite apart, however, from the legal effect of the State Court Judgment, we think the operating contract had the effect of constituting Brit-ton the operating agent or trustee for all the co-tenants, in all matters respecting the operation of both leases.

There is no trust relation-between co-tenants as such one is not the agent of the other. See: Prairie Oil & Gas Co. v. Allen, 8 Cir., 2 F-2d 566, 40 A.L.R. 1389; Earp v. Mid-Continent Petroleum Corporation, supra, 67 Okl. 86, 27 P.2d 855, 91 A.L.R. 188; Taylor v. Brindley, supra; and Sharpies Corporation v. Sinclair, Wyo., 167 P.2d 29. They undoubtedly may, by their separate agreements, employ an operator to possess and manage the cotenancy, without creating a trust relationship between themselves and the operating agent. See: White v. A. C. Houston Lumber Co., 179 Okl. 89, 64 P.2d 908 and cases cited; Commercial Lumber Co. v. Nelson, 181 Okl. 122, 72 P.2d 829; and Edwards v. Hardwick, Okl., 350 P.2d 495. Cf. Grannell v. Wakefield, 172 Kan. 685, 242 P.2d 1075. But when, as here, co-tenants undertake to designate a co-tenant as operating agent, to exploit the cotenancy for their mutual profit, they become co-adventurers in the enterprise, and stand in a fiducial relationship to-each other and to the operating agent, See: Taylor v. Brindley, supra; Eagle-Picher v. Mid-Continent Lead & Zinc Co., 10 Cir., 209 F.2d 917; Blackstock Oil Co. v. Caston, 184 Okl. 489, 87 P.2d 1087; Vilbig Construction Co. v. Whitham, Okl., 152 P.2d 916; Bosworth v. Eason Oil Co., Okl., 213 P.2d 548. Cf. Brannan v. Sohio Petroleum Co., 10 Cir., 248 F.2d 316; Rees v. Briscoe, Okl., 315 P.2d 758; and Brannan v. Sohio Petroleum Co., 10 Cir., 260 F.2d 621. As operating agent, the co-tenant assumed to act for and on behalf of his co-tenants, and he is thus the trustee for his co-tenants and co-adventurers. See: Taylor v. Brindley, supra; Rees v. Briscoe, ibid.; Bosworth v. Eason Oil Co., ibid.; and Blackstock Oil Co. v. Caston, ibid.

Under the several contracts of the co-tenants, Britton was put in possession of the leaseholds, with the power and duty to operate them for the mutual profit of all co-tenants. She is the operating trustee and is before the Court to account for her trusteeship. In these circumstances, it is reasonable to impute notice of this proceedings to the absent co-tenants. Cf. Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 70 S.Ct. 652, 94 L.Ed. 865.

When we come to weighing the relative rights of the parties, i. e., the right of the mortgagee to his Receiver and the right of the absent co-tenants to the benefit of their operating contract, it is not inappropriate to consider that the mortgagee seeks to protect the co-tenancy against an unfaithful operating trustee. He seeks to conserve the property for the benefit of all, and the unfaithful trustee should not be allowed to plead the indispensability of absent parties in avoidance of the proceedings to bring her to account.

Viewed in this light, our situation is comparable to the capacity of less than all the beneficiaries of a trust to have a trustee removed, if he has so conducted himself that he ought to be removed, for “ * * * [n] o beneficiary has a right to have the affairs of a trust conducted unlawfully, and no beneficiary can complain of the removal of a trustee if it is demonstrated that he has, because of misconduct, become an unfit person to occupy that position.” Wesson v. Crain, 8 Cir., 165 F.2d 6, 9. The trial Court has found from the evidence that the trustee has breached her contract and her fiducial obligations, and that the property is in danger of dissipation. If the pendente lite Receivership is a detrimental interference with the contract rights of the absent parties, there is ample opportunity for intervention to assert those rights, or even a claim for tortious interference.

The judgment of the trial Court on the second claim is affirmed.

1 . The State Court Judgment pertinently provides: “It is, Therefore, Considered, Ordered, Adjudged And Decreed that the title and possession of said Plaintiffs in and to said Oil and Gas Lease be, and the same is hereby, forever settled and quieted in the Plaintiffs against the Defendants and as following respective proportions: to each other in the

Milton M. Green and Donald C. Bloink: [plaintiff herein] Und. 7/64ths

Morgan Hockenberger and Margaretta C. Hockenberger: [plaintiff herein] an undivided l/32nd or <4 2/64ths

Ronald E. Mitchell: [plaintiff herein] 44 l/64th

Carroll W. Britton: [defendant herein] 44 83/256ths

Carroll W. Britton held in trust for Edward C. Lacy: [non-party Michigan resident herein] Und. l/128th

Carroll W. Britton held in trust for Pearl Keller: [non-party Michigan resident herein] 44 l/16th

Carroll W. Britton held in trust for Mrs. Rose Eirsht: [non-party Michigan resident herein] 44 19/256ths

Rachel Jane Ballou: [defendant herein] 44 l/8th W. A. Thompson: [defendant herein] 44 l/4th ”

2 . The Agreement, by which all of the parties acquired their respective interests in the leasehold, pertinently recited:

“It is further agreed that Seller shall have the right and option to purchase the oil produced from said premises and run to the credit of Purchaser. Seller will pay the posted field price in the area for such production * * *. “It is agreed that Seller shall have active charge of the operation of said

leasehold estate, and that said premises shall be operated to the mutual interest of all parties hereto as economically as good business judgment will warrant. It is further agreed that the parties hereto will observe the spirit as well as the strict letter of this contract and work at all times to the mutual advantage of each other in the management and operation and development of said lease. * * * ”