LITTLE v. MOUNTAIN VIEW DAIRIES

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District Court of Appeal, Fourth District, California.

LITTLE et al. v. MOUNTAIN VIEW DAIRIES, Inc.

Civ. 3828.

Decided: December 15, 1948

Dolley, Knight, Woods & Hightower, of Los Angeles, for appellants. Joseph A. Ball and E. P. Mulholland, both of Long Beach, for respondent.

Appeal by plaintiffs and cross-defendants from a judgment on the pleadings and minute order in an action for declaratory relief and an accounting.

Geneva Deeble and others, predecessors in interest of plaintiffs and appellants herein, by grant deed dated December 14, 1935, conveyed to defendant and respondent, Mountain View Dairies, Inc., a corporation, a limited interest in real property described as ‘eight and one-third per cent (8 1/313%) of all oil, gas and other hydro-carbon substances, and minerals, in, under and/or which may be hereafter produced and saved from’ the real property described therein.

Plaintiffs R. C. Little and Blanche L. Little acquired title to the real property by deed of August 12, 1936, which excepted from the conveyance the interest theretofore conveyed to defendant. The exception was worded as follows: ‘Excepting therefrom eight and one-third (8 1/313%) per cent of all oil, gas and other hydro-carbon substances, and minerals, in, under and/or which may be hereafter produced and saved from said property, as granted to Mountain View Dairies, Inc., a corporation, by deed dated December 14, 1935.’

Plaintiffs leased the property to one Hillman by an instrument dated February 23, 1945, entitled ‘Oil and Gas Lease’ which lease reserved to the lessors R. C. Little and Blanche L. Little a royalty of one-sixth of all oil produced and saved from the premises or at the option of lessor, the lessee agreed to purchase lessor's royalty oil at the market value in the same field.

The lease also provided in part as follows:

‘10. In case said Lessor owns a less interest in the above described lands than the entire and undivided fee simple estate therein, then the royalties and rentals herein provided for shall be paid the said Lessor only in the proportion which his interest bears to the whole undivided fee.

‘10–a. Lessor agrees that in no event shall Lessee be required to pay greater rents or royalties than provided in this lease and Lessor further agrees that Lessor will fully satisfy and discharge any and all of the obligations and requirements under that certain Deed dated December 14, 1935, and recorded in Book 792, Page 476 of Official Records, Orange County, California, insofar as the above described land and the production therefrom is concerned. And Lessor further agrees to protect Lessee against any expense, loss or damage arising as a result of claims or rights asserted by others in or under said deed above referred to.’

The defendant corporation did not sign the lease but on March 1st, 1945, executed a separate document attached thereto, which reads as follows: ‘The within Oil and Gas Lease is hereby ratified, approved confirmed.’

The lessee and his successors in interest drilled wells upon the premises and are producing oil and gas therefrom and have paid to plaintiffs the sum of $3425.48, which sum represents the value of one-sixth of the gross production of oil and gas from the property.

The principal controversy herein is as to the division of the royalty between plaintiffs and defendant. The plaintiffs contend that they are entitled to 91 2/323% of the royalties payable under the lease and defendant contends that it is entitled to 8 1/313% of all oil produced, and is entitled to approximately 50% of the 16 2/323% royalty paid.

In determining the question involved it is necessary to consider the nature of the interest conveyed by the grant deed to defendant Mountain View Dairies, Inc. While the title to the oil and gas in place was not transferred by the deed (Callahan v. Martin, 3 Cal.2d 110, 43 P.2d 788, 101 A.L.R. 871), the grantee became the owner of a fee interest and entitled to 8 1/313% of the oil and gas which might thereafter be produced and saved from the premises. The interest in the oil and gas to be produced is an interest or estate in real property, which the grantor may convey in whole or in part. Standard Oil Co. v. J. P. Mills Organization, 3 Cal.2d 128, 132, 43 P.2d 797.

The owner of land has the exclusive right on his land to drill for and produce oil. This right, if transferred, is a profit a prendre, a right to remove a part of the substance of the land, and is an interest in real property in the nature of an incorporeal hereditament. The profit a prendre, whether it is unlimited as to duration or limited to a term of years, is an estate in real property. If it is for a term of years, it is a chattel real, which is nevertheless an interest in real property, although not real property or real estate. Where it is unlimited in duration it is a freehold interest, an estate in fee, and real property or real estate. Dabney-Johnston Oil Corp. v. Walden, 4 Cal.2d 637, 649, 52 P.2d 237.

At the time of the execution of the conveyance there was no oil lease on the property and the grantors named therein became co-tenants with the defendant corporation in the oil rights in the land. Dabney-Johnston Oil Corp. v. Walden, supra. The rights of tenants in common in oil rights in land are referred to in that case at page 655. See also, 40 A.L.R. p. 1400, Annotation to Prairie Oil & Gas Co. v. Allen, 8 Cir., 2 F.2d 566, 40 A.L.R. 1389 and 91 A.L.R. 205, Annotation to Earp v. Mid-Continent Petroleum Corp., 167 Okl. 86, 27 P.2d 855, 91 A.L.R. 188.

In 40 A.L.R. 1389, it is said:

‘A conveyance of a parcel of oil-bearing land with reservation of a specified portion of the oil produced and right to enter upon and use the surface for the purpose of securing and marketing the oil, does not impose upon the grantor the duty of delivering to the grantee the portion of the oil granted, free from the cost of production.’

In Prairie Oil & Gas Co. v. Allen, supra, the conveyance, as here, contained no express provision requiring the grantor to develop the property for oil and gas and deliver it to the grantee of a 1/10110 interest therein, without cost or expense. The court held that the parties were tenants in common and that the grantee was not entitled to 1/10110 of oil free and clear of expenses of development and production.

In Earp v. Mid-Continent Petroleum Corp., supra, 27 P.2d at page 858, the court held that when one co-tenant entered upon the premises and discovered oil and gas thereon, he must account to a non-consenting or non-producing co-tenant for his pro rata share of the net profits apportioned according to the fractional interest of such co-tenant; the net profits to be determined by deducting from the market value of the oil or gas produced, and necessary expense of developing, extracting, and marketing the same. To the same effect are Naharkey v. Sand Springs Home, 177 Okl. 371, 59 P.2d 289, at page 293; Kentucky-West Virginia Gas Co. v. Hatfield, 260 Ky. 315, 85 S.W.2d 672, 675; Davis v. Atlantic Oil Producing Co., 5 Cir., 87 F.2d 75, 77; and Gray v. Taylor, Tex.Civ.App., 138 S.W.2d 891, 896.

As was said in Dabney-Johnston Oil Corp. v. Walden, supra, 4 Cal.2d at page 657, 52 P.2d at page 247:

‘There can be no question but that under the line of cases which sustains the right of a single co-tenant to produce oil, with the duty to account to the nonproducing cotenants for their fractional interests, it is held that the interests of the nonproducing cotenants are generally subject to a charge or deduction for their proportion of drilling and operation expenses.’

We hold that the defendant corporation acquired a right to 8–1/313% of the oil and gas produced under the terms of the grant deed, subject to a charge for its proportion of the drilling and operation expenses.

In Manley v. Boling, 1939, 186 Okl. 59, 96 P.2d 30, the landowner, prior to any lease for oil, conveyed an ‘undivided one-sixteenth (1/16116) of all the oil, gas and other minerals in and under the aforementioned lands, and which may be found therein, or produced therefrom’ etc. Later, the then owner of the land and the mineral grantee joined in an oil lease providing for a one-eighth (1/818) royalty. The action was to determine the extent of the mineral grantee's interest. 96 P.2d at pages 31 and 32, the court said:

‘Defendants urge that the trial court erred in holding that by the contracts they acquired only 1/16116 of the mineral interest or 2 1/212 royalty acres, under each tract. They contend that a conveyance of 1/16116 of the oil in place is equivalent to a conveyance of 1/212 of the royalty interest. This argument apparently proceeds upon a misconception of the nature of the interest conveyed, or is based upon the confusion of a mineral interest in lands with an interest in the royalty reserved in an oil and gas mining lease. While it is true that one-half of the 1/818 royalty ordinarily reserved in an oil and gas lease is 1/16116, it does not follow that the purchase of 1/16116 of the oil and gas in and under land entitles the purchaser to one-half of the royalty reserved in a lease thereon. Ordinarily, where owners of mineral interests join in the execution of an oil and gas lease, granting to the lessee 7/878 of the oil, their interests are proportionately reduced, so that in order to share equally in the royalty reserved, the estates of the respective lessors in the minerals must have been the same. Thus if a party purchased 1/16116 of the minerals, and joined with the owners of the remaining 15/161516 in a lease reserving a 1/818 royalty, his share in such royalty would be 1/16116 of such 1/818, in the absence of any agreement to share in different proportions. And the result would be the same if at the date of the purchase of the mineral interest the land were subject to an oil and gas lease. The purchaser's interest in the royalty reserved therein would be in the exact proportion that his interest in the minerals bore to the whole mineral estate.’

Other cases to the same effect are Swearingen v. Oldham, 1945, 195 Okl. 532, 159 P.2d 247; Murphy v. Dilworth, 1941, 137 Tex. 32, 151 S.W.2d 1004; Richardson v. Hart, 1945, 143 Tex. 392, 185 S.W.2d 563; Shinn v. Buxton, 10 Cir., 1946, 154 F.2d 629.

The lease of the property to Hillman created a profit a prendre and vested in the lessee an estate in the real property involved. Gavina v. Smith, 25 Cal.2d 501, 505, 154 P.2d 681. The parties to the action and the lessee were tenants in common. Barnard v. Jamison, 78 Cal.App.2d 136, 137, 177 P.2d 341.

The lease, which was ratified, approved and confirmed by defendant corporation, provided for the payment to plaintiffs of that proportion of rentals which their interest bears to the whole undivided fee in the real property. Defendant having confirmed the conveyance to the lessee of 5/656 of the oil and gas to be reserved from the premises now seeks to recover approximately one-half of the entire royalty or rent payable under the lease. By its ratification of the lease to Hillman defendant became a participating royalty owner and entitled to 8–1/313% of the oil and gas royalty agreed to be paid by the lessee, just as effectively as if the defendant corporation had originally joined in the lease. Gill v. Bennett, Tex.Civ.App., 59 S.W.2d 473, 475; Texas & Pacific Coal & Oil Co. v. Kirtley, Tex.Civ.App., 288 S.W. 619, 622.

Appellants contend that the granting of the motion by Mountain View Dairies, Inc. for judgment on the pleadings was improper. It is not necessary to decide the point as we conclude that under the circumstances here shown, the court erred in the ruling that the Mountain View Dairies, Inc. was entitled to 8–/ 3% of all oil and gas produced from the land involved, without deduction, and in ruling that it was entitled to 8–1/313% of the entire proceeds from the sale of all oil and gas.

Judgment reversed.

MUSSELL, Justice.

BARNARD, P. J., and GRIFFIN, J., concur.