Exeter Exploration Co. v. Fitzpatri

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 l 2 0 1983 Av Filed:

Mr. Justice Daniel J. Shea delivered the Opinion of the Court.

Defendants, J. W. Fitzpatrick, et al. appeal from a judgment of the Rosebud County District Court quieting title to the working interest in an oil and gas lease i favor of plaintiffs, Exeter, et n al. and defendant, Younghlccd. The dispute stems from an assignment m d e in 1969 by J. W. Fitzpatrick of certain portions of his interest in an oil and gas lease. The assignment was part of a plan of Fitzpatrick's to liquidate a family corporation. The assignees were himself, his wife and 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 own only overriding royalty interests, and also ruled that the trusts were not entitled to interest on the amounts withheld pending the outcom of litigation.

We reverse and remand for entry of judgment in favor of J. W. Fitzpatrick, et al. Fitzpatrick, et al. 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 if the gift was valid, nonetheless, J. Lee Youngblmd had a right to notice i writing of that assignmeat n and 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 had a right to acquire the working interest by specifically eiaforcing 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 + h lease and assigned n _e 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 the . n 1969 a s - . sit 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 o had been one of the h

original parties t o the 1954 operating agreement. J. Lee Youngblood sought t o acquire the r e s t of the outstanding working interests. On

My 26, a 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 t o J. Lee Youngblood. After obtaining these assignmints, J. L e e Youngblood believed that he owned 100

percent of the working interest in the lease. H then contracted e

with meter Exploration Corpany e t a l . t o explore and develop oil. and gas wells on the land. Ownership or control of 100 percent of the working interest i n an o i l and gas lease is necessary as a basis for exploration and developnent. Developwnt was successful and the lands became productive in 1972.

In t h i s 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 t o the portion of the working interest which had been assigned t o them i n 1969. Therefore the trusts argue that by the 1972 assignment Youngblood acquired only the one-third working interest which J. W. Fitzpatrick had reserved t o himself in the 1969 assignment.

In 1975, Yo~,mgbloodbegan t o 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 l e t t e r s t o 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 t h a t they had no claim t o the working interest in the lease.

The f i r s t question is, of course, whether t h e 1969 assignment t o the t r u s t s was valid. I f so, Youngblood argues t h a t he n.onetheless had a r i g h t t o exercise the preferential purchase r i g h t contained i n the 1954 operating agreement. This agreement gave ea.ch party a preferential r i g h t t o purchase the working i n t e r e s t of another party upon m e t i n g the terms offered a purchaser. J. W. Fitzpatrick's assignroents to his childrens' trusts were gifts. In effect, Youngblood claims that the preferential purchase clause requires t h a t before J. W. Fitzpatrick could give h i s working i n t e r e s t a s a g i f t t o his children, he first should have offered it a s a gift to Youngblood.

The t r i a l court concluded t h a t the 1969 assignment was inva.lid f o r the f a i l u r e of delivery, f a i l u r e of acceptance and f o r retention of dominion and control over the working interest by J. W. Fitzpatrick. W e hold. t h a t the 1969 a.ssignment t o the trusts was valid; t h a t delivery was s u f f i c i e n t , t h a t the t r u s t s accepted the assignment and t h a t J. W. Fitzpatrick's involvement with. the lorking i n t e r e s t did not constitute an exercise of dominion and control over the working i n t e r e s t .

DELIVERY AND ACCEPTANCE

In 1929, we held t h a t actual o r symbolic delivery is not necessary t o complete a g i f t effectuated by an instrument i n writing. Sylvain, e t a l . v. Page (1929), 84 Mont. 424, 276 P. 16. J. W. Fitzpatrick executed and recorded t h e 1969 assignmnt. The t r i a l court found t h a t J. W. Fitzpatrick's i n t e n t i n making the assignment was t o transfer income from o i l and gas production t o h i s wife and t o the four t r u s t s f o r h i s children. We therefore conclude t h a t delivery was complete.

W have no doubt, furthermore, t h a t the trusts accepted the 1969 e

assignment. Acceptance i s presumed i f a gratuitous a s s i p ~ z t s i

beneficial t o the assignee. 6 Arn.Jur.2d Assignments S 93. The t r i a l court noted t h a t 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 f a c t , the record shms t h a t this lease was the only nonproducing lease included in the assignment, and the only one which did not generate income. I t cannot be doubted t h a t the n e t e f f e c t of t h e e n t i r e assignment was beneficial t o the t r u s t s . As such, acceptance of the trusts is p r e s m d .

TXXilINION AND C N R L OTO

The t r i a l court concluded tha.t J. W. Fitzpatrick continued t o exercise dominion and control over the working i n t e r e s t . The t r i a l court r e l i e d on two factors i n reaching t h i s conclusion. First, for the years 1970-71 and 1971-72, J. W. Fitzpatrick paid the lease r e n t a l s on the subject lease. Second, i n Novemlr 1969, J. FJ. Fitzpatrick executed documents circulated by Continental O i l Company which showed him t o be the owner of the working i n t e r e s t i n va-rious 1-eases which had been included i n the 1969 assignments t o t h e trusts. This evidence is insufficient t o support a conclusion t h a t J. W. Fitzpatrick retained dcaninion and control over the working i n t e r e s t s assigned t o the t r u s t s .

The t o t a l amount J. W. Fitzpatrick paid f o r the lease r e n t a l s f o r both years was l e s s than $50, y e t the value of the disputed working interest was over $200,000. When conpared with the value of the working i n t e r e s t , the lease r e n t a l p a p e n t is inconsequentia.1. Although J. W. Fitzpatrick was not reimbursed, the evidence suggests t h a t the paymmts might have been inadvertent. J. W. Fitzpatrick had extensive o i l and gas holdings and i n 1969 had retained a p r t i o n of the working i n t e r e s t 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 and control, particularly in view of the fact that although expl.orationand developnent of the oil and gas was taking place, nothing in the record suggests that J. W. Fitzpatrick played any role i the developrent or production under n the lease. We therefore hold that there is not sufficient evidence that J. W. Fitzpatrick retained dcaninion and control over the working interests which he had assigned to the trusts. PREFERENTIAL PURCHASE We turn next to Youngblood's al-ternativeclaim that even if the 1-969assignment 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 in writing to the other ~arties ... the terms and conditions upon which it or he is willing to transfer - assign the and interests involved and the other parties, or any of them, shall, for a period of ten (10) days after receipt of such notice, have an option to purchase such interest on the terms and conditionFcontained .in 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 in 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 15 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 had actual knowledge of the 1969 assignment in December

1975 when he was shown a copy of the assignment by his employee, Lloyd Terry. WE? note that the disputed 1969 assignment to the

trusts was drafted by the same J~lovdTerry, 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, to notify J. W Fitzpatrick and the four . Fitzpatrick trusts of his intent to 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 ? a transfer without c consideration between family &s r. 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 by 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 the 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 by the trusts. The fact that in 1975, J. W. Fitzpatrick and 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 . had. J. W. Fitzpatrick made no representation in the 1972

assignment to Youngblood which would make it incompa.tible 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 we cannot agree that Youngblood also

has a r i g h t t o the working interests of the four Fitzpatri-ck t r u s t s and t o pay nothing f o r them.

INTEREST

The trusts have not received my of the proceeds from production under the lease. Payment has been suspended pending outcome of t h i s s u i t . The t r i a l court held t h a t no i n t e r e s t i s due

on amounts payable t o t h e four Fitzpatrick t r u s t s . W find no e

evidence of a written agreement among the p a r t i e s disallowjng

interest on suspended p a p a t s . W hold t h a t i n t e r e s t is payable a t e

the leqal r a t e on a l l amounts due the four Fitzpatrick t r u s t s a s working i n t e r e s t awners. The suspended payrents never d i d and could not have belonged. t o any other than the tuusts. Equitable

principles - require the payment of i n t e r e s t on those m u n t s . See:

Sterl-ing v. Marathon O i l Co. (Kan. 1978), 576 P.2d 635; P h i l l i p s Petroleum Co. v. Stah1 Petroleum Co. (Tex. 1978), 569 S.W.2d 480; Shutts v. Phillips Petroleum Co. (Kan. 1977), 567 P.2d 1292; P h i l l i p s Petroleum Co. v. Adams (5th C i r . 1975), 513 F.2d 355.

W reverse and d i r e c t the D i s t r i c t Court t o e m t e r judgment f o r e

the appellants i n accordance with this opinion. W e Concur: Frank I. Haswell