Superior Oil Corp. v. Wilson

1940 OK 196, 103 P.2d 535, 187 Okla. 447, 1940 Okla. LEXIS 269

• Court: Supreme Court of Oklahoma
• Decided: April 9, 1940
• Docket: No. 28736.
• Status: Published

Opinions

WELCH, V. C. J.

This is an appeal from the district court of Seminole county, Okla., involving a suit to impress a trust, to terminate trust, and for an accounting, in and to a 1/ 6th interest in a certain tract of land in Seminole county, Okla.

This action was originally filed' by Freelan Pruitt on December 26, 1933, against the Superior Oil Corporation. He died on May 19, 1934, and the action was revived by Mattie Wilson, executrix of the estate of Freelan Pruitt, deceased, on January 14, 1936. September 21, 1937, C. W. Sandlin intervened, asserting that he had acquired an interest therein by virtue of a contract between himself and Mattie Wilson individually.

Essential facts are that Freelan Pruitt, a minor, who attained majority December 25, 1931, owned an undivided l/6th interest in a tract of land. During his minority an oil and gas lease on his interest in said land was sold through probate court to one Norvell and came by assignment to be owned by A. E. Graham, C. E. Gragg, and Gordon Dovell, hereinafter called “assignees.” By the terms of the lease the “assignees” were to prospect and develop the land for oil and gas and have for themselves %ths of the production and pay to the minor %th of the production. The “assignees” by a bargain with the Superior Oil Corporation assigned to Superior a certain interest or portion of the lease in consideration of the agreement of Superior to drill and develop the premises. As agreed, Superior did drill and develop the premises and produced oil therefrom. Up to this point the rights of the parties to the oil production, so far as disclosed by the records, were as follows: The minor was entitled to Vsth royalty by the terms of the original lease; the “assignees” were entitled to the portion of the %ths working interest which they had reserved by their bargain with and assignment to Superior; and Superior was entitled to the portion of the %ths working interest assigned to them by “assignees,” and for which Superior had agreed to and did develop the premises.

But the minor had sued the “assignees” and recovered from them the portion of the %ths working interest they had attempted to reserve for themselves. This recovery was had by the minor on the theory that by reason of the method employed in obtaining the original lease to Norvell, which was fully known in detail by the “assignees,” the said “assignees” held the lease in trust for the minor. See Gragg v. Pruitt, 179 Okla. 369, 65 P. 2d 994. Thus by that litigation the record rights of the “assignees” came to be recognized as rights belonging to the minor, who thereby owned his own original %th royalty interest, together with the reserved portion of the %ths working interest which did not pass by assignment from the “assignees” to Superior.

By this action the ward, Freelan Pruitt, after reaching majority, seeks to recover from Superior the remaining interest in the lease, being the portion of the 7sths working interest assigned to Superior by the “assignees,” and received by Superior on its agreement to drill and develop the premises. Or, to state it more exactly, plaintiff by this action seeks to recover from Superior a portion of the total value of oil produced equal to the portion of the working interest conveyed to Superior by “assignees” as to plaintiff’s interest in the land.

We should here note that legal title to the leasehold interest fully passed to the original lessee, Norvell, and by assignment to the “assignees.” It has never been adjudged otherwise, nor contended otherwise, either by the plaintiff in the former litigation or by the plaintiff, Freelan Pruitt, in this action or by the successor plaintiff herein or by the intervener. It would follow that legal title passed to Superior to that portion or interest assigned by “assignees.” It was determined in the prior litigation that while “assignees” held title to their retained interest in the lease, they held it in trust for the benefit of the minor.

By the terms of the lease “assignees” were obligated to prospect and develop the premises for oil. The fact that they held in trust for the benefit of the minor did not lessen their duty to drill and develop. That fact, if affecting their duty to develop at all, might be said to have increased it. Whatever they held in trust for this minor, they should have diligently held. Holding a leasehold privilege and right to drill for and produce oil, in trust for the ultimate benefit of the minor, they should diligently drill, or prudently obtain the drilling and development. See Gragg v. Pruitt, supra; In re Bowman’s Estate (Pa.) 2 Atl. 2d 725; Lancaster Bank v. Marshel (Neb.) 264 N. W. 470; Crane v. Owens, 180 Okla. 452, 69 P. 2d 654; Graham v. Dunlap, 179 Okla. 295, 65 P. 2d 538.

If “assignees” had themselves drilled the wells to production and consequent great profit, and had accounted to the minor for the production, either voluntarily or after suit, it seems reasonable to say that they would have been entitled to deduct the cost of production. If they had prudently paid someone else in cash to drill, they would have been entitled to deduct such cash expenditure, or to have the lessor reimburse them out of the production. If they, holding the lease in trust for the minor’s benefit, had prudently contracted to obtain the drilling and to pay therefor out of the oil produced, or by and with a reasonable amount or per centum of the oil produced, such a contract should be regarded as properly in the discharge of their duties as holders in trust, in view of the circumstances of this particular trust. Then it would seem to follow that when they procured the drilling and development by conveying to Superior an interest in the lease, such interest would fully pass to Superior, if the agreement was a prudent one, and the interest conveyed to Superior was a reasonable and proper consideration for the drilling and development of the premises.

In Restatement of the Law of Trusts, sec. 283, this rule is stated:

“If the trustee transfers trust property to a third person or creates a legal or equitable interest in the subject matter of the trust in third person, and the trustee in making the transfer or in creating the interest does not commit a breach of trust, the third person holds the interest so transferred or created free of the trust, and is under no liability to the beneficiary.”

And in the same authority, .sec. 296, there is this statement:

“If the trustee transfers trust property in breach of trust to a transferee for value, the transferee takes free of' the trust although he had notice of the existence of the trust, unless he has notice that the trustee is committing a breach of trust in making the transfer.”

In this case the oil production was quite substantial, and resulted in large benefits to the minor, as the owner of the Vsth royalty, and the adjudged owner of the substantial portion of the %th working interest reserved by the “assignees” when they dealt with Superior. Those benefits were fully enjoyed by the minor until his majority, and two years and one day thereafter before filing this suit, and we assume that since this suit was filed such benefit has been enjoyed by the plaintiff Pruitt and his successors in interest. No such benefits could have resulted but for the drilling and developing of the lands for oil. They all in fact followed and resulted from the drilling and development obtained by the bargain between “assignees” and Superior.

When one is beneficial owner of property or rights, held in trust for his benefit by another, and the trustee makes a prudent bargain, resulting in great benefit to the owner, who receives and fully enjoys the fruits of the bargain, equity will not be exercised to return also the consideration paid out in the bargain. It is not contended that the contract made by “assignees” with Superior was in any sense unreasonable, or that the assignment made to Superior was in any sense excessive when made.

In fact, the conduct here goes far towards showing complete ratification. The benefits of these transactions were accepted, in large sums, by the minor and his guardian, and by the ward after obtaining majority, and by the successor plaintiff. There was never any direct repudiation by suit to cancel or the like. This action in effect would recognize the validity of the conveyance to Superior, but by appeal to the equitable power of the court would seek to impress the trust character on the consideration paid for developing the corpus of the original trust, that is, the oil and gas leasehold, or the right to drill and develop.

The trial court’s judgment for plaintiff was based on the conclusion that defendant Superior had constructive knowledge of the details of the obtaining of the original lease by Norvell, and had constructive knowledge that “assignees” held the lease in trust for the benefit of the minor. If that be accepted as true, it would not necessarily follow that the contract assignment to Superior would fall, under the circumstances here existing. The premises being undeveloped theretofore, it might well be said that the adjudicated trust holding by “assignees” was a holding for development, and would support, as in due execution of the trust, a reasonable and proper contract for such development, as for' the benefit of the real owner. However, we do not find such conclusion of knowledge by Superior to be supported by the evidence.

It was shown by clear and convincing evidence that “assignees” had actual knowledge in detail. See Gragg v. Pruitt, supra, but that showing was not made until it was developed in the litigation long after Superior had taken its assignment and developed the premises and produced oil therefrom. It is fair to assume that “assignees,” at the time they were dealing with Superior, were concealing details well known to them, or at least were refraining from making any disclosure thereof whatever, because they were trying to bargain for a valuable reservation to themselves, and did do so.

While it was later shown that “assignees” had knowledge of all details, it was not so shown as to Superior. That is, it was not shown that Superior had notice or knowledge that Norvell bought and held the lease for Orwig, or of any details of the sale of the original guard-, ian’s lease, or of the details as to payment of the consideration for the original lease, or any notice or knowledge of the trust character of the holding by “assignees.”

There was evidence of some statements made to one Hayden, then an employee of Superior, who was obtaining signatures or closing other details for Superior in connection with this assignment. There was conflicting evidence as to the capacity in which Hayden was employed. He was not in charge of titles and did not’ pass upon them. He was employed in a lesser capacity, probably to handle closing and signing details, but his exact capacity is not of controlling importance. He did discuss the leasing and assignment details with “assignees” and those interested with them. He was told, or it was said in his presence, in effect that the title to the minor’s interest lease was bad or was not perfect or that another sale would be necessary to pass title; and also by a general observation or statement in effect that the lease had not been paid for. These statements in the evidence fall far short of equalling the clear showing of detailed knowledge in “assignees,” and when considered in connection with the existing circumstances, do not show notice to Superior. If the first statement is taken literally, it was not correct. The title was indicated by the record as being perfectly good and based on a valid sale, and, as heretofore pointed out, it was not contended that it did not pass legal title. If that statement was made exactly as stated in the evidence, an examination of the record by the title examiner would have dispelled any doubt as to the validity of the sale and the resulting title in the “assignees.” There was nothing in that statement., to indicate- any holding in trust. As to the record statement relative to nonpayment for the lease, if made at or about the time of the assignment to Superior, it was incorrect. That consideration was not paid when the minor’s lease was sold and confirmed, but it had been paid some months before January, 1928, when Superior took the assignment. There is nothing to indicate that if these items had been deemed sufficiently important to justify investigation and had been investigated, any disclosure would have followed of the details of the guardianship sale, not shown of record, but which afterwards came to light.

In Gragg v. Pruitt, supra, there was ample supporting evidence, but not so here. With “assignees” holding an oil and gas lease in trust for the benefit of the minor, upon undeveloped land, and making a prudent contract and reasonable partial assignment to procure development, and thereby procuring development of great value and benefit to the minor, equity should not take from the developing company the assigned consideration upon a finding of the holding by “assignees,” unless notice sufficient to constitute constructive knowledge is shown by clear and convincing proof. The showing here does not approach that requirement. The proofs by Superior of lack of knowledge in any of its officers; the fact that Superior took this assignment, in reliance on the record, and expended much money in drilling and developing, and in fact had no knowledge contrary to the record showing, are most persuasive.

See Kowalsky v. Kimberlin (Cal.) 160 P. 673; Kennedy v. Bridge, 120 Okla. 51, 250 P. 427; F. B. Collins Inv. Co. v. Waide, 70 Okla. 191, 173 P. 835, and Brooks v. Tucker, 83 Okla. 255, 201 P. 643.

From the whole record we are quite convinced that, according to the clear weight of the evidence, Superior took this assignment without any knowledge, and without notice of any fact sufficient to direct inquiry, as to the trust character of “assignees’ ” holding; that Superior took this partial assignment in good faith, for a valuable consideration, and by performing its required duty in the bargain, contributed largely to the due execution of “assignees’ ” trust, to the enrichment substantially of the plaintiff. We find no basis in equity to take from Superior its assigned interest or the proceeds thereof.

The plaintiff cites authority for the rule; asi-,to..burden of proof, and . degree of proof, on the question of innocent purchaser, in cases of conveyance procured by fraud, but this case does not involve such fraud as was pointed out in the former decision.

The plaintiff cites decisions to the general effect that notice of facts sufficient to excite attention and put a party on guard, and call for inquiry, is effective as knowledge, but such rules are not applicable under the circumstances here for the reasons pointed out.

The plaintiff contends this assignment to Superior was without consideration because Superior was already obligated to drill the premises by virtue of its agreement with owners of the remaining five-sixths interest in the land. The facts are that Superior took assignments or leases from all the owners of interests in the tract, and with each of such owners agreed to drill. That is a usual and ordinary procedure. With several such owners it is hardly possible to deal simultaneously with all. The agreement to drill would necessarily be made first with one or more of the owners, and thereafter with others. Nevertheless the agreement with the last owner of a fractional interest to drill for his benefit, to the extent of his interest in the land or lease, would furnish ample consideration for his assignment. Here Superior had agreed with other owners to drill a day or two before closing with “assignees,” but it was all part of the general plan to acquire all the leases or a fair interest therein and then develop the premises. We find no merit in this contention. See American Law Institute, Restatement, Contracts, vol. 1. sec. 84; Earp v. Mid-Continent Pet. Corp., 167 Okla. 86, 27 P. 2d 855, 91 A. L. R. 188; Compton v. People’s Gas Co., 75 Kan. 572, 89 P. 1039, 10 L. R. A. (N. S.) 787.

The defendant with some merit presents defenses based upon the statute of limitations, and “laches,” and defective party plaintiff, but we deem it unnecessary to discuss them in any specific detail.

Upon our conclusion that the finding and judgment is against the clear weight of the evidence, the judgment is reversed, and the cause remanded, with directions to render judgment for the defendant.

BAYLESS, C. J., and CORN, HURST, and DAVISON, JJ., and McLENNAN, Special Justice, concur. OSBORN, J., concurs in conclusion. RILEY, J., and LYDICK, Special Justice, dissent.