No. 13198
I N THE SUPREME COURT O THE STATE OF M N A A
F OTN
197 6
E. P. SCHLEGEL,
P l a i n t i f f and A p p e l l a n t ,
SHERMAN MOORHEAD and ROSELLE
MOORHEAD, husband and w i f e ,
Defendants and Respondents.
Appeal from: D i s t r i c t Court o f t h e Ninth J u d i c i a l D i s t r i c t ,
Honorable B. W. Thomas, Judge p r e s i d i n g .
Counsel o f Record:
For Appellant :
Smith, Emmons, B a i l l i e and Walsh, G r e a t F a l l s ,
Montana
Robert J. Emmons a r g u e d , G r e a t F a l l s , Montana
F o r Respondents:
F r i s b e e and Moore, Cut Bank, Montana
John P. Moore a r g u e d , Cut Bank, Montana
Submitted: J u n e 2 , 1976
Decided : AUGbq& 1,c-~6
Filed : gv g ;q-J (:?e
, *i
Mr.J u s t i c e John Conway H a r r i s o n d e l i v e r e d t h e Opinion of t h e
Court.
P l a i n t i f f a p p e a l s from t h e judgment of t h e d i s t r i c t
c o u r t d i s m i s s i n g h i s c o m p l a i n t f o r s p e c i f i c performance o f a n
o p t i o n t o p u r c h a s e a f e d e r a l o i l and g a s lease from t h e de-
fendant.
The p e r t i n e n t f a c t s a r e s e t f o r t h a s shown by t h e d i s -
t r i c t c o u r t f i n d i n g s o f f a c t and t h e r e c o r d . Defendant Sherman
Moorhead h a s been t h e owner s i n c e 1956 of f e d e r a l o i l and g a s
l e a s e number 073 1 5 1 ( a ) , c o n s i s t i n g of 120 acres i n Glacier
County, Montana. H e a c q u i r e d t h e l e a s e f o r s a l v a g e and h a s
m a i n t a i n e d o n l y one p r o d u c i n g w e l l on t h e a c r e a g e . Said w e l l
h a s n o t produced s u f f i c i e n t r e v e n u e t o pay t h e a n n u a l r o y a l t y .
A t a l l t i m e s p e r t i n e n t h e r e t o Moorhead employed a pumper who
operated t h e well.
Moorhead worked i n t h e o i l f i e l d s i n G l a c i e r County from
1937 t o 1964 and i s f a m i l i a r w i t h o i l f i e l d o p e r a t i o n s and terms.
H e h a s l i t t l e e x p e r i e n c e w i t h t h e b u s i n e s s end of o i l o p e r a t i o n s ,
and no p r e v i o u s e x p e r i e n c e w i t h o p t i o n s . W i t h i n t h r e e y e a r s of
t h e t i m e o f t h e o p t i o n i n d i s p u t e h e r e , he t w i c e a t t e m p t e d t o
s e l l t h e lease w i t h no s u c c e s s . A t no t i m e r e l e v a n t t o t h i s c a s e
d i d he make any e f f o r t t o l e a r n of o i l f i e l d developments i n t h e
v i c i n i t y of h i s l e a s e by making i n q u i r i e s o f h i s pumper, h i s
a t t o r n e y i n t h e a r e a , o r t h e p u b l i c r e c o r d s a t t h e O i l and G a s
Commission o f f i c e i n S h e l b y , Montana. Moorhead l i v e d i n B u t t e ,
Montana from 1964 t o t h e t i m e of t h i s l a w s u i t .
P l a i n t i f f S c h l e g e l i s a United S t a t e s c i t i z e n who l i v e d
i n C a l g a r y , A l b e r t a , Canada from 1952 t o 1973. H e h a s been en-
gaged i n o i l f i e l d s a s a roughneck, h a s s o l d r e a l e s t a t e , and
h a s bought and s o l d o i l l e a s e s . H e d e c i d e d t o l e a v e Canada i n
1973 d u e t o h i s d i s s a t i s f a c t i o n w i t h Canadian p o l i t i c s , and re-
s o l v e d t o engage i n t h e o i l b u s i n e s s i n Montana.
I n November 1973, S c h l e g e l v i s i t e d t h e O i l and G a s
Commission o f f i c e s i n S h e l b y , Montana and m e t a g e o l o g i s t .
The g e o l o g i s t recommended Township 37 N , Range 5 W a s a n a r e a
t o r e v i e w f o r p o s s i b l e lease o p p o r t u n i t i e s . T h i s township i s
where Moorhead's l e a s e i s l o c a t e d . From t h e p u b l i c r e c o r d s i n
t h e Shelby o f f i c e o f t h e O i l and Gas Commission S c h l e g e l l e a r n e d
t h a t most o f t h e a c r e a g e i n t h a t a r e a was h e l d by Union O i l .
Union O i l d e c l i n e d t o farm o u t any a c r e a g e t o S c h l e g e l . From
h i s r e v i e w o f t h e r e c o r d s , S c h l e g e l became aware o f t h e l e a s e
h e l d by Moorhead.
S c h l e g e l l e a r n e d from h i s e x a m i n a t i o n o f t h e p u b l i c
r e c o r d s a t Shelby t h a t Union O i l r e c e n t l y had b r o u g h t i n a w e l l
d e s i g n a t e d a s "Kruger 4E13", and t h a t t h e w e l l was c a p a b l e o f
p r o d u c i n g o i l and g a s i n commercial q u a n t i t i e s . H e a l s o learned
t h e f i g u r e s r e p o r t e d f o r t h e e a r l y s t a g e s o f o i l and g a s f l o w ,
t h a t t h e w e l l w a s l o c a t e d on a c r e a g e a d j o i n i n g l a n d c o v e r e d by
t h e Moorhead l e a s e , and t h a t Union O i l had l o c a t e d a n o t h e r d r i l l -
i n g s i t e , known as "Kruger 5E13", a l s o on l a n d a d j a c e n t t o t h e
Moorhead l e a s e .
On a d a t e p r i o r t o J a n u a r y 1 2 , 1974, S c h l e g e l made a
t e l e p h o n e c a l l t o Moorhead and asked him whether he w a s i n t e r e s t e d
i n selling h i s lease. Moorhead r e p l i e d t h a t he was, and set a
p r i c e o f $5,000. Three s u b s e q u e n t t e l e p h o n e c a l l s by S c h l e g e l
t o Moorhead e s t a b l i s h e d f u r t h e r i n f o r m a t i o n a b o u t t h e l e a s e , and
s e t t h e p u r c h a s e p r i c e a t $5,000 p r o v i d e d t h a t Moorhead g i v e
S c h l e g e l a 90-day o p t i o n t o p u r c h a s e f o r a $100 c o n s i d e r a t i o n .
O J a n u a r y 1 8 , 1974, S c h l e g e l c a l l e d Moorhead and a d v i s e d him
n
t h a t h e had p r e p a r e d t h e o p t i o n and would come t o B u t t e t o meet
Moorhead on t h e f o l l o w i n g d a y t o c l o s e t h e d e a l . Moorhead a g r e e d .
On J a n u a r y 1 9 , 1974, S c h l e g e l and h i s w i f e m e t w i t h
Moorhead a t a motel i n B u t t e . S c h l e g e l b r o u g h t w i t h him a form
of o p t i o n agreement which he had p r e p a r e d . Moorhead t h e n r e a d
over t h e option. There was no f u r t h e r d i s c u s s i o n o f t h e t e r m s
of t h e o p t i o n , b u t i n t h e c o u r s e o f c o n v e r s a t i o n Moorhead asked
S c h l e g e l why he was i n t e r e s t e d i n t h e l e a s e and S c h l e g e l re-
p l i e d t h a t h e had a g e n e r a l i n t e r e s t i n t h e a r e a and had become
d i s s a t i s f i e d w i t h t h e p o l i t i c a l s i t u a t i o n i n Canada. Schlegel
d i d n o t t h e n o r a t any t i m e t e l l Moorhead o f t h e i n f o r m a t i o n
which S c h l e g e l had o b t a i n e d r e l a t i v e t o t h e w e l l Kruger 4E13 o r
t h e l o c a t i o n of Kruger 5E13, b o t h on l a n d a d j o i n i n g l a n d c o v e r e d
by t h e Moorhead l e a s e . The o p t i o n w a s s i g n e d by t h e p a r t i e s i n
t h e p r e s e n c e of a s i g n i n g w i t n e s s . Moorhead a c c e p t e d from
S c h l e g e l a d r a f t f o r $100 a s payment of t h e o p t i o n c o n s i d e r a t i o n .
T h e r e a f t e r , on two o c c a s i o n s w i t h i n t h e o p t i o n p e r i o d ,
S c h l e g e l a c c e p t e d and e x e r c i s e d t h e o p t i o n t o p u r c h a s e Moorhead's
l e a s e and t e n d e r e d $4,900 t o Moorhead a s payment t h e r e f o r . Moor-
head r e f u s e d t h e t e n d e r and r e f u s e d t o c a r r y o u t t h e o p t i o n on
both occasions.
S c h l e g e l sued f o r s p e c i f i c performance of t h e o p t i o n t o
p u r c h a s e t h e o i l and g a s l e a s e . Moorheads answered and c o u n t e r -
claimed f o r : (1) c a n c e l l a t i o n o r r e s c i s s i o n o f t h e o p t i o n on t h e
ground of f r a u d ; ( 2 ) damages o f $5,000 f o r s l a n d e r o f t i t l e ; and
( 3 ) a c t u a l damages and exemplary damages f o r f r a u d , t o t a l l i n g
$56,000.
The d i s t r i c t c o u r t o f t h e n i n t h j u d i c i a l d i s t r i c t , s i t -
t i n g w i t h o u t a j u r y , Honorable B . W. Thomas p r e s i d i n g , concluded
a s a matter of l a w t h a t n e i t h e r p l a i n t i f f n o r d e f e n d a n t - c o u n t e r -
c l a i m a n t s w e r e e n t i t l e d t o t h e r e l i e f prayed f o r . Judgment was
e n t e r e d i n f a v o r of d e f e n d a n t s a g a i n s t p l a i n t i f f ' s c o m p l a i n t ;
t h e c o m p l a i n t was d i s m i s s e d ; and judgment was e n t e r e d i n f a v o r
of p l a i n t i f f s a g a i n s t d e f e n d a n t s ' c o u n t e r c l a i m . Only t h e p l a i n -
t i f f S c h l e g e l a p p e a l s from t h e judgments o f t h e d i s t r i c t c o u r t .
The i s s u e s on a p p e a l a r e :
1. Did t h e d i s t r i c t c o u r t err i n r e f u s i n g s p e c i f i c
performance of t h e o p t i o n on t h e ground t h a t S c h l e g e l f a i l e d
t o i n f o r m Moorhead o f t h e e x i s t e n c e and l o c a t i o n of t h e Kruger
w e l l s 4E13 and 5E13?
2. Did t h e d i s t r i c t c o u r t err i n r e f u s i n g s p e c i f i c
performance o f t h e o p t i o n on t h e ground of inadequacy o f con-
sideration?
3. Did t h e d i s t r i c t c o u r t err i n c o n s i d e r i n g t h e t e s t i -
mony of d e f e n d a n t s ' e x p e r t w i t n e s s ?
W e p r e f a c e o u r d i s c u s s i o n of t h e i s s u e s w i t h a s t a t e m e n t
of t h e r u l e e n u n c i a t e d i n I n t e r i o r S e c u r i t i e s Co. v . Campbell,
55 Mont. 459, 470, 178 P . 582:
"A d e c r e e f o r s p e c i f i c performance i s n o t
g r a n t e d a s a m a t t e r of a b s t r a c t r i g h t , b u t i n
e v e r y i n s t a n c e t h e a p p l i c a t i o n f o r such r e l i e f
i s a d d r e s s e d t o t h e sound, l e g a l d i s c r e t i o n of
t h e c o u r t . * * * The c a s e comes w i t h i n t h e
g e n e r a l r u l e , o f t e n a d v e r t e d t o by t h i s c o u r t ,
t h a t i n t h e a b s e n c e of a clear showing of a b u s e
o f d i s c r e t i o n t h e d e c i s i o n o f t h e lower c o u r t
w i l l be a f f i r m e d . "
See a l s o : Babcock v . Engel, 58 Mont. 597, 194 P . 137.
The f o c u s of S c h l e g e l ' s a s s i g n m e n t s o f e r r o r i s upon t h e
d i s t r i c t c o u r t ' s f i n d i n g o f f a c t No. 25 and c o n c l u s i o n of l a w
No. 3 . The former r e a d s :
"25. Enforcement of t h e o p t i o n agreement would
be u n j u s t and u n r e a s o n a b l e a s t o Moorhead b e c a u s e
of ( a ) t h e inadequacy of t h e c o n s i d e r a t i o n , and,
( b ) t h e f a i l u r e of S c h l e g e l t o f u l l y and c a n d i d l y
i n f o r m Moorhead of t h e c o m p l e t i o n of Kruger w e l l
4E13 and t h e l o c a t i o n o f Kruger 5E13 when h e re-
p l i e d t o Moorhead's J a n u a r y 1 9 t h i n q u i r y a s t o
why h e was i n t e r e s t e d i n t h e l e a s e . "
C o n c l u s i o n s o f l a w No. 3 i s s i m i l a r , o m i t t i n g t h e words " f u l l y
and c a n d i d l y " .
I t i s c l e a r t h a t s a i d f i n d i n g and c o n c l u s i o n a r e based
upon s e c t i o n 17-808, R.C.M. 1947, which s t a t e s i n r e l e v a n t p a r t :
"What p a r t i e s c a n n o t be compelled t o perform.
S p e c i f i c performance c a n n o t be e n f o r c e d a g a i n s t
a p a r t y t o a c o n t r a c t i n any o f t h e f o l l o w i n g
cases:
"1. I f he h a s n o t r e c e i v e d a n a d e q u a t e c o n s i d -
eration for the contract;
"2. I f i t i s n o t , a s t o him, j u s t and r e a s o n a b l e ;
" 3 . I f h i s a s s e n t w a s o b t a i n e d by t h e m i s r e p r e s e n -
t a t i o n s , concealment, c i r c u m v e n t i o n , o r u n f a i r
p r a c t i c e s o f any p a r t y t o whom performance would
become due under t h e c o n t r a c t * * * . "
A s t o t h e f i r s t i s s u e , Schlegel contends t h a t t h e option
t r a n s a c t i o n w a s a t arms l e n g t h and t h e r e was no d u t y upon him t o
d i s c l o s e t o Moorhead h i s knowledge g a i n e d from p u b l i c r e c o r d s
which were e q u a l l y a c c e s s i b l e t o Moorhead. On t h e o t h e r hand,
Moorhead a r g u e s t h a t S c h l e g e l i s g u i l t y of a m u l t i t u d e of f r a u d s ,
a p o s i t i o n which was r e j e c t e d by t h e d i s t r i c t c o u r t . However,
o u r t a s k i s t o d e t e r m i n e whether t h e d i s t r i c t c o u r t abused i t s
d i s c r e t i o n i n r e f u s i n g s p e c i f i c performance, and we need n o t
r e s o l v e t h e c o n f l i c t i n g arguments of t h e p a r t i e s c o n c e r n i n g a c t u a l
and c o n s t r u c t i v e f r a u d and t h e l i k e .
I t i s u n d i s p u t e d t h a t S c h l e g e l w a s aware of t h e Kruger
w e l l s on J a n u a r y 1 9 , 1974, and of t h e f a c t t h a t t h e y had sub-
s t a n t i a l production p o t e n t i a l . I t i s a l s o e s t a b l i s h e d t h a t when
a s k e d "why" h e w a s i n t e r e s t e d i n Moorhead's l e a s e , S c h l e g e l s a i d
he had a " g e n e r a l " i n t e r e s t i n t h e a r e a . The q u e s t i o n i s n o t
whether S c h l e g e l ' s answer was f r a u d u l e n t o r n o t , b u t whether
Moorhead's a s s e n t w a s o b t a i n e d by t h e " m i s r e p r e s e n t a t i o n s , con-
cealment, circumvention, o r u n f a i r p r a c t i c e s " of Schlegel. Sec-
t i o n 1 7 - 8 0 8 ( 3 ) , R.C.M. 1947. T h i s d i s t i n c t i o n i s s i g n i f i c a n t be-
c a u s e under s e c t i o n 17-808 a c o u r t i n e q u i t y h a s f a r more l a t i t u d e
i n a s s e s s i n g t h e conduct of t h e p a r t i e s before i t than does a
c o u r t determining t h e l e g a l elements of fraud. As stated i n
I n t e r i o r S e c u r i t i e s , supra:
" * * * To s e c u r e t h e d e s i r e d r e l i e f [ s p e c i f i c
performance] i n t h i s i n s t a n c e , a p p e l l a n t s w e r e
required to come into court with clean hands
and with a cause whose ethical qualities were
such as to commend it to the conscience of the
chancellor. * * * "
The district court specifically found that Schlegel
did not affirmatively misrepresent a lack of development in the
area, and this finding is not challenged here. However, it is
not necessarily inconsistent for the district court to hold
that enforcement against Moorhead would be unjust and unreason-
able due to Schlegel's concealment or circumvention in answer
to Moorhead's question. In short, we do not find an abuse of
discretion on this point.
The second issue concerns the inadequacy of the consid-
eration. Section 17-808(1) makes this factor a defense to an
action for specific performance of contract. Babcock v. Engel,
58 Mont. 597, 194 P. 137. The district court made no finding
as to the specific value of the lease, and Schlegel argues that
therefore it cannot properly find, as it did in finding of fact
No. 24, that the "option price of $5,000.00 was disproportionate
to the real value of the lease in the light of information avail-
able from public records on January 19, 1974."
We cannot agree with Schlegel's contention. There is
ample evidence in the record to show that the Kruger 4E13 and
5E13 wells were in close proximity to Moorhead's lease and were
anticipated to be put into commercial production. Kruger 4E13
was shown to have produced substantial quantities of oil, and for
the reasons appearing hereafter, it was sufficient to support the
findings.
The final issue is whether Moorhead's expert witness'
testimony should have been considered by the district court.
Virgil Chamberlain testified for the Moorheads on the value of
the Moorhead lease. His testimony was founded upon his own
extensive knowledge and experience in the area, and upon the
public records of the production of the nearby Kruger 4E13 well.
The objections to this testimony were overruled as to admissi-
bility, but the testimony was weighed in light of the grounds
for the objections.
Schlegel's assignment of error on this point is related
to the second issue, inadequacy of consideration. He argues
that Chamberlain's value estimate of over one million dollars
is so speculative and inaccurate as to vitiate the district
court's finding No. 24 that $5,000 was disproportionate to the
value of the lease. However, the district court did not speci-
fically refer in its findings on consideration to the valuation
given by Chamberlain. Furthermore, as was pointed out in our
discussion of the second issue, there is evidence to sustain
the district court's finding of inadequacy of consideration in-
dependently of Chamberlain's testimony. Therefore, assuming any
error in the admission of said testimony, it is harmless and
cannot be the basis of a reversal on appeal. Cf. Benner v. B. F.
Goodrich Co., 150 Mont. 97, 430 P.2d 648.
In view of the foregoing, we hold that the district court
did not abuse its discretion by refusing to grant to Schlegel
specific performance of the option to purchase Moorhead's oil
and gas lease.
The judgment of the
P\istrict court is affirmed.
+*&
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Justice
We concur:
4-4c-%!?4
--------
-
Hon. Edward T. Dussault, district
judge, sitting in place of Mr.
Chief Justice James T. Harrison.