No. 83-244
IN THE SUPREIE COURT OF THE STATE OF MONTANA
1984
BARNEY REAGAN,
Plaintiff and Respondent,
UNION OIL COMPANY OF CALIFORNIA,
a corp., and THE MONTANA POWER CO.,
a corp. ,
Defendants and Respondents.
APPEAL FROM: District Court of the Second Judicial District,
In and for the County of Silver Bow,
The Honorable -
, Judge presiding.
FR+SQK 3 t f i g ' R
E.2
COUNSEL OF FECORD:
For Appellant:
Jardine, Stephenson, Riewett & Weaver; Curtis G.
Thompson and Alexander Blewett argued, Great Falls,
Montana
For Respondents:
Poore, Roth & Robinson; C. Richard Anderson and
Robert Poore argued, Butte, Montana
Submitted: November 17, 1983
Decided: January 23, 1984
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Filed:
Clerk
Mr. Justice L.C. Gulbrandson delivered the Opinion of the
Court.
This case comes on appeal from an order granting
plaintiff's motion for partial summary judgment on September
14, 1982, by the District Court of the Second Judicial
District, Silver Bow County. We vacate the order of the
District Court.
Pursuant to a 1944 agreement, Reagan's predecessor in
interest and his associates (Reagan Associates) owned a
twenty percent "net proceeds" interest in profits derived
from production obtained from certain oil and gas leases on
the Blackfoot Indian Reservation. The twenty percent "net
proceeds" interest was to be paid by Union Oil. Pursuant to
an agreement entered into on October 18, 1954, the "net
proceeds" interest was converted into a "general obligation
and liability" of Union Oil and Montana Power to pay Reagan
Associates certain sums of money annually. The reason for
converting the "net proceeds interest" to a "general
obligation and liability" was that the parties were aware
that the Department of Interior might not approve an
assignment of an overriding royalty on a Tribal lease.
Under the agreement, the "net proceeds" interest was
quit-claimed to Union Oil in return for Reagan Associates
receiving a "general obligation and liability" of Union and
Montana Power to pay Reagan Associates certain sums of money
"measured by and that [were] equal in amount" to a fixed
percentage of the value of the petroleum produced. The
agreement did not use the terms "royalty" or "overriding
royalty" and was silent as to payment of taxes. Plaintiff,
Barney Reagan, succeeded to ownership of the "general obli-
gation and liability" upon the death of his father in 1969.
Since 1954, Union and Montana Power have deducted from
the payments under the agreement certain sums for payment of
various state and federal taxes including the following:
(a) Oil and gas conservation tax, Section 82-11-131,
MCA.
(b) Oil and gas severance tax, Section 15-36-101, MCA.
(c) Resource indemnity trust tax, Section 15-38-104,
MCA.
(d) Oil and gas net proceeds tax, Title 15, Chapter
23, part 6, MCA.
(e) Windfall Profits Tax, 26 USCA Sections 4986 -
et.
seq.
In 1970, Reagan executed and delivered to Union Oil
division orders pertaining to the production of oil and gas.
The division orders provided that "[tlhe undersigned . . .
certify and warrant they are the legal owners in the
proportions set out . . . of all the oil, and in the
proceeds from casinghead gas produced from ... " Union's
Tribal leases.
The division orders stated that payments should be
made to the respective parties for amounts due, "less any
taxes required by law to be deducted and paid by [Union] ."
In addition, Section (5) of the division orders provided:
"It is distinctly understood that the
Owners will pay their respective portions
of all taxes imposed upon the products
produced from said land, including but
not by way of limitation, taxes imposed
upon the production, severance, gathering
and disposition of such products, and if
Union pays any such tax on account of the
interests of the Owners, the amount so
paid may be deducted from payments due
t h e Owners h e r e u n d e r . "
The central issue before the District Court was
w h e t h e r Union O i l a n d Montana Power had properly withheld
portions of Reagan's annual payments for tax purposes
b e c a u s e Regan h e l d a t a x a b l e "economic i n t e r e s t . "
Reagan f i l e d s u i t a g a i n s t Union and Montana Power in
May, 1981, alleging that t h e d e d u c t i o n s f o r t a x e s were i n
d e r o g a t i o n o f t h e 1954 a g r e e m e n t and r e q u e s t i n g judgment i n
t h e amount of a l l t h e sums w i t h h e l d together with i n t e r e s t
from the dates of such withholdings. On J u n e 30, 1982,
Reagan moved f o r a p a r t i a l summary judgment p u r s u a n t t o R u l e
5 6 ( c ) of t h e Montana R u l e s o f C i v i l Procedure. Union and
Montana Power f i l e d o p p o s i n g b r i e f s on A u g u s t 1 9 , 1 9 8 2 . On
September 14, 1982, the District Court entered its order
granting Reagan partial summary judgment. The District
C o u r t o r d e r e d t h a t a n y and a l l p a y m e n t s made p u r s u a n t t o t h e
1954 a g r e e m e n t w e r e n o t s u b j e c t t o t h e t a x e s a t i s s u e ; that
contrary to the e x p r e s s p r o v i s i o n s of t h e 1954 a g r e e m e n t ,
d e f e n d a n t s u n l a w f u l l y w i t h h e l d money f r o m Reagan; that the
money had t o be accounted for and returned; and t h a t t h e
defendants were prohibited from any future withholdings.
Further, the District Court, upon Reagan's concession,
applied the s t a t u t e of limitation defense raised (Section
27-2-202(1), MCA, and l i m i t e d R e a g a n ' s r e c o v e r y t o amounts
w i t h h e l d d u r i n g t h e e i g h t y e a r s p r e c e d i n g t h e commencement
of the action. In addition, the District Court denied
d e f e n d a n t ' s motion f o r l e a v e t o conduct f u r t h e r d i s c o v e r y .
On September 23, 1982 the defendants moved the
District Court for an order rescinding, amending or
modifying i t s o r d e r g r a n t i n g p a r t i a l summary judgment. On
November 12, 1982, the District Court denied the motion
stating ". . . as a matter of law the written contract of
the parties of October 18, 1954, created a general
obligation and liability of Union Oil and Montana Power and
not a economic interest with respect to the oil or gas in
place in the ground. This is fatal to Defendant's
contentions." Thereafter, defendants filed their notice of
appeal.
Appellants, Union Oil and Montana Power, raise six
issues on appeal:
(1) Did the Distict Court err in granting respondent's
motion for partial summary judgment ruling as a matter of
law that there was no genuine issue of material fact as to
respondent's payments being non-taxable?
(2) Did the division orders executed by respondent
create a question of fact as to authorization by respondent
of deduction for taxes?
(3) Was there a question of fact regarding the defense
of laches and, as a matter of law, the appellants could not
rely on the defense of laches?
(4) Did the District Court's denial of appellants'
motion for leave to conduct further discovery, which was
filed after submission of respondent's motion for summary
judgment, constitute reversible error?
(5) Did the District Court's order granting partial
summary judgment on September 14, 1982, and its further
order of November 10, 1982, sufficiently explain the basis
for granting respondent's motion for partial summary
judgment?
(6) Did the District Court err in awarding respondent
prejudgment interest?
We find the first two issues dispositive of the
matter.
The purpose of summary judgment is to encourage
judicial economy by eliminating unnecessary trials and an
order for summary judgment will be upheld in those cases in
which the complaining party fails to demonstrate the
existence of material and substantial facts that would alter
the decision made below. Cereck v. Albertsons, Inc. (Mont.
1981), 637 P.2d 509, 38 St.Rep. 1986. Summary judgment is
never to be used as a substitute for trial if a factual
controversy exists. Reaves v. Reinbold (Mont. 1980), 615
P.2d 896, 37 St.Rep. 1500. The standard that an appellate
court applies in reviewing a grant or denial of a motion for
summary judgment is the same as that utilized by the trial
court initially under Rule 56, M.R.Civ.P.--a summary
judgment is proper when it appears "that there is no genuine
issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law." 10 Wright and
Miller, Federal Practice and Procedure, section 2716 p. 643.
Summary judgment is proper only if the pleadings,
depositions, answers to interrogatories and admissions on
file show there is no genuine issue of material fact.
Anderson v. Applebury (1977), 173 Mont. 411, 567 P.2d 951.
If there is any doubt as to the propriety of a motion for
summary judgment, it should be denied. Cheyenne Western
Bank v. Young (1978), 179 Mont. 492, 587 P.2d 401; Kober v.
Stewart (1966), 148 Mont. 117, 417 P.2d 476.
In the present case, the District Court determined
that there was no genuine issue of material fact because the
O c t o b e r 1 8 , 1954 c o n t r a c t c r e a t e d a " g e n e r a l o b l i g a t i o n a n d
l i a b i l i t y " and n o t a n " e c o n o m i c i n t e r e s t " t h e r e b y p r e c l u d i n g
appellants from withholding portions of respondent's
annual payments for tax purposes. However, the record
i n d i c a t e s t h e r e was a g e n u i n e i s s u e o f f a c t a s t o whether
t h e O c t o b e r 1 8 , 1954 a g r e e m e n t c r e a t e d a t a x a b l e " e c o n o m i c
interest." Although the agreement refers to respondent's
payment as a "general obligation and liability," the
p a y m e n t s were t o t a l l y d e p e n d e n t on t h e amount and v a l u e o f
production. In F o r b e s v. Mid-Northern O i l Company (1935),
100 Mont. 1 0 , 45 P.2d 673, we s a i d t h a t t h e n a t u r e o f the
interest is d e t e r m i n e d by the instrument considered as a
whole and n o t by t h e l a b e l s u s e d by t h e p a r t i e s . Similarly,
i n P a l m e r v . Bender ( 1 9 3 3 ) , 287 U.S. 551, 557, 53 S.Ct. 225,
77 L.Ed. 4 8 9 , 4 9 3 , t h e U n i t e d S t a t e s Supreme C o u r t s a i d t h a t
t h e r e t e n t i o n of an o w n e r s h i p o r l e g a l i n t e r e s t i n t h e o i l
is n o t a n e c e s s a r y p r e r e q u i s i t e t o a n "economic i n t e r e s t . "
An "economic interest" is defined in Treas.Reg., section
1.6.11-l(b)(l) a s follows:
"An e c o n o m i c i n t e r e s t i s p o s s e s s e d i n
e v e r y c a s e i n which t h e t a x p a y e r h a s
a c q u i r e d , by i n v e s t m e n t , a n y i n t e r e s t i n
mineral i n place . . .
by a n y form o f
l e g a l r e l a t i o n s h i p , income d e r i v e d f r o m
t h e e x t r a c t i o n of t h e m i n e r a l
which h e m u s t l o o k f o r a r e t u r n o f h i s
to ...
captial. "
Although it would be premature for us to decide
w h e t h e r t h e O c t o b e r 1 8 , 1954 a g r e e m e n t c r e a t e d a n " e c o n o m i c
interest," t h i s was a g e n u i n e i s s u e o f m a t e r i a l f a c t and t h e
District Court erred in granting respondent's motion for
p a r t i a l summary judgment.
In addition, the conduct of the parties in the
execution and acquiesence to the terms of the division
orders created a genuine issue of fact. Specifically, the
division orders provided that respondent certified and
warranted that he was the legal owner of a certain portion
of the oil and gas produced by appellants. Moreover,
section (5) of the orders states that respondent will pay
his respective portion of taxes imposed upon production,
including but not by way of limitation, taxes for
production, severence and gathering. Section (5) of the
division orders also provides, ". . . and if Union pays any
such tax on account of the interests of the Owners, the
amount so paid may be deducted from payments due the Owners
hereunder ." Thus, the language of the division orders, if
used to supplement the terms of the 1954 agreement, could be
construed as a representation of ownership of the oil and
gas by respondent and as authorizing the challenged
withholdings.
Williams and Meyers, Oil and Gas Law, section 705, p.
451, abridged edition, states:
"Insofar as the division or transfer
order differs from the lease as concerns
the measurement of quantity, quality,
price or value of the production, the
lease provisions are modified by the
provisions of the order as to all parties
to the unrevoked order. Thus the lease
may provide in very general terms for the
payment of royalty on production and the
division order (or a contract of sale
incorporated in the division order by
reference) may contain much more specific
provisions on the same matters, which may
be inconsistent with details of the lease
royalty clause. Under such circumstances
the provisions of the division or
transfer order govern until such order is
revoked. "
Williams and Meyers, Oil and Gas Law, section 711, p. 455,
abridged edition, also states:
"Where there is disagreement over the
construction of a, particular instrument,
the provisions of a division order
executed by the parties to such other
instrument may be evidence of the proper
construction thereof on the theory of
contemporaneous construction of the
latter instrument by the parties."
We cannot speculate as to what the parties intended,
however, summary judgment is usually inappropriate where the
intent of the contracting party is an important
consideration. Fulton v. Clark (1975), 167 Mont. 399, 538
P.2d 1371; Kober, supra.
The language of the division orders, which is part of
the District Court record, raise a doubt as to the propriety
of the partial summary judgment and the motion therefore
should have been denied. Cheyenne Western Bank, supra. The
party opposing a motion for summary judgment must be
afforded the benefit of all reasonable inferences which may
be drawn from the offered proof. Reaves, supra.
In addition to the language contained in the division
orders, the provisions of the tax statutes at issue should
have persuaded the District Court to deny respondent's
motion for partial summary judgment. For example, the oil
and gas severence tax, Section 15-36-101(3), MCA, as well as
the resource indemnity trust tax, Section 15-38-104, MCA,
allow for the deduction of a pro rata share of the tax from
payments made in settlements under division of proceeds
orders and other contracts.
In sum, there existed genuine issues as to whether the
appellants properly withheld portions of respondent's annual
payments and we therefore vacate the decision of the
District Court and remand the case for further proceedings.
Justice /
We concur:
Chief Justice
Justices
Justice John C. Sheehy, dissenting:
I dissent and would affirm the decision of the District
Court granting summary judgment in favor of Barney Reagan.
The majority opinion shows a startling indifference to,
or lack of knowledge of, the operation and effect of division
orders on their underlying instruments in the oil and gas
production business.
The production of oil and natural gas in Montana, at the
time of this case, is subject to the following taxes:
1. Oil and Gas Conservation Tax, section 82-11-131,
MCA. Under this tax provision, the producer pays the tax for
oil or gas "produced for himself, as well as for another,
including a royalty owner. . ."
2. An Oil and Gas Severance Tax, section 15-36-101,
MCA. Here the producers are required to pay this tax in full
for their own account and for the account of each other owner
"of the gross proceeds in value or in kind of all
the marketable . . .
oil or natural gas extracted
and produced, including owner or owners of working
interest, royalty interest, overriding royalty
interest, carried working interest, net proceeds
interest, production payments, and all other
interest or interests owned or carved out of the
total gross proceeds in value or in kind"
of such production. Section 15-36-101(3), MCA. That statute
also provides " [ulnless otherwise provided - - contract -
in a or
lease, the pro rata share of any royalty owner or owners will
be deducted from any settlements under said lease or leases
or division of proceeds orders or other contracts."
(Emphasis suppl-ied) .
3. A Resource Indemnity Trust Tax, section 15-38-104,
MCA. This tax is laid on any person engaged in the business
of mining, extracting or producing minerals in Montana. The
statute provides further "[ulnless otherwise provided - -
in a
c o n t r a c t - l e a s e , t h e p r o r a t a s h a r e o f any r o y a l t y owner o r
or
owners may be d e d u c t e d from any s e t t l e m e n t s under t h e l e a s e
o r l e a s e s o r d i v i s i o n of p r o c e e d s o r d e r s o r o t h e r c o n t r a c t s . "
(Emphasis s u p p l i e d ) .
4. An O i l and Gas N e t P r o c e e d s Tax, s e c t i o n 15-23-607,
MCA. T h i s t a x i n c l u d e s a.n a s s e s s m e n t of r o y a l t i e s p a i d t o a
royalty owner (section 15-23-605), and i s payable by the
o p e r a t o r o r prod-ucer who may d e d u c t from t h e r o y a l t y owner an
estimated amount of the tax to be paid by him upon the
royalty o r royalty interest.
5. A Windfall Profits Tax, levied by the Federal
government under section 26 U.S.C. 5 4986, et seq. The
w i n d f a l l p r o f i t s t a x i s l a i d on t h e p r o d u c e r o f t a x a b l e c r u d e
o i l and g a s , and t h e p r o d u c e r i s d e f i n e d a s t h e " h o l d e r o f
t h e economic i n t e r e s t w i t h r e s p e c t t o t h e c r u d e o i l . " 26
U.S . C . S 4996 ( a ) (1)( A ) . I n t e r n a l Revenue r e g u l a t i o n s p r o v i d e
t h a t a p r o d u c e r i s t h e " h o l d e r of t h e economic i n t e r e s t w i t h
r e s p e c t t o t h e c r u d e -l - p l a c e - -e g r o u n d . "
oi in i n th I R S reg.
51. 4996-1 ( b ) (1) (Emphasis s u p p l i e d ) .
I have stated those tax provisions at length to
demonstrate t o t h e reader t h a t t h e various s t a t e t a x e s a r e
l a i d upon t h e p r o d u c e r s and t h e r o y a l t y owners of t h e o i l and
g a s , and i n t h e f e d e r a l c a s e , upon t h e owner of t h e c r u d e o i l
i n p l a c e i n t h e ground.
A t i s s u e i n t h i s c a s e t h e n i s who i s t h e owner o f the
o i l and g a s r i g h t s h e r e i n q u e s t i o n , t h e Montana Power Co.
and Union O i l Co. on t h e one hand o r Barney Reagan on t h e
o t h e r , a s one of t h e Reagan A s s o c i a t e s .
Clearly i n t h i s case, Montana Power Co. and Union O i l
Co. a r e t h e owners o f t h e working i n t e r e s t , subject only t o
t h e r o y a l t y payments t o t h e l a n d owners ( i n t h i s case, the
tribes). Clearly in this case, Barney Reagan, and the Reagan
Associates, have no ownership in the oil and natural gas
either produced and saved, or in place in the ground.
It should further he clear that the precise issue in
this case is not the payment of the oil and gas taxes. Those
taxes have been paid, and will in the future continue to be
paid. The point at issue in this case is whether Montana
Power Co. and Union Oil Co. can deduct from Barney Reagan's
rightful payments here the amounts of those oil and gas
taxes.
Prior to October 18, 1954, the Reagan Associates under a
contract with Union Oil were entitled to 20% of the net
profits derived from production of oil and ga.s under certain
leases on tribal lands, from all formations down to and
including the Madison formation, and 15% of the net profits
derived from production from all formations under the Madison
formation. On October 18, 1954, by written agreement, the
Reagan Associates converted the 20%-15% net profits interest
in production from said oil and gas leases to a general
obligation and liablity Oil and Montana Power
Co. based upon 5% of the value of the oil and gas produced
from the leased tribal lands.
On October 18, 1954, the Reagan Associates was a group
of persons and entities which included Ed. Reagan, the father
of the plaintiff here, the then governor of Montana, J. Hugo
Aronson, J. E. Corette, Jr., either the attorney for or
president of the Montana Power Co. at the time, and numerous
officers or attorneys of the Montana Power Co. and members of
their families.
The underlying leases in which the Reagan Associates had
a 20%-15% net profits interest ea.ch contained the following
language :
"The lessee hereby agrees that he will not. assign
or sublet any part of the lands herein leased
without the written consent of the lessor and the
approval of the Secretary of the Interior. The
assignment of this lease or any interest therein
without such written consent and approval shall
constitute a violation of one of the material and
substantial terms and conditions of this lease and
be cause of cancellation thereof."
It is therefore clear that if the written agreement of
October 18, 1954 converted the 20%-15% net profits interest
of the Reagan Associates into an overriding royalty interest,
then the agreement should necessarily be submitted to the
tribe !the lessor) and the Secretary of the Interior for
approval. The attorneys representing Union Oil Co., and the
Montana Power Co., and the members of the Reagan Associates
themselves recognized that in 1954 such a conversion to an
overriding royalty interest would not be approved either by
the tribe or by the Secretary of the Interior, but
particularly by the latter. The clear intent of the parties
was to devise an instrument tha.t did not constitute a
transfer of ownership that must be approved by the Secretary
of the Interior, but rather to find a way to create a general
obligation of Union Oil Co. and Montana Power Co. which would
not have to be submitted to the Secretary of the Interior for
approval.
Discovery procedures conducted before the District Court
here, have yielded letters which shed much light on the
intention of the parties with respect to the problem of the
agreement. On January 28, 1954, Mr. L. V. Ketter, a Butte
attorney, wrote to Mr. J. E. Corette, at the Montana Power
Co. , a letter reporting on a meeting of January 22, 1954, in
Great Falls, "concerning the conversion of the net profits
interest of the Reagan Associates in the production from the
Union lands to 5% overriding royalty in the production from
Union and Montana lands." In long dissertation in the
letter, Mr. Ketter outlines that an overriding royalty
interest would probably be subject to the approval of the
Secretary of the Interior, and that the risk involved was
cancellation of the tribal leases. Mr. Ketter enclosed
copies of the a.greement which was executed on October 18,
1954, and stated:
"If the leases were to be cancelled for the breach
of the provisions therein, or of the regulati.ons,
requiring prior approval of an assignment of any
interest in them, then of course, Union and Montana
would lose the respective leaseholds and the
Associates would lose not only the overriding
royalty but their net profits interest which the
royalty interests were to supplant. If the the
leases were not cancelled but only the royalty
assignments were voided through some action of the
government, or the government and the tribe, then
there would be a failure of consideration for the
surrender of the net profits interest and the
latter would probably be reinstated as a matter of
law. "
Mr. Corette thereafter wrote a letter to Mr. Ketter on
March 30, 1954. It is not clear from the letter whether Mr.
Corette was wearing the chapeau of J. E. Corette, Jr. one of
the Reagan Associates, or the sombrero of an officer or
attorney of the Montana Power Co. At any rate however, he
said:
"Union, from its contacts with the Department of
the Interior, is satisfied that the Department will
not approve any overriding royalty on Indian
leases,*but will approve net proceeds arrangements
comparable to the former arrangement with Reagan
Associates. Bert [refers to Bert Gibbons, then
general counsel of Union Oil Co.] suggests that we
consider the following alternatives:
"1st. Execute the agreement and send it to Reagan
Associates with a letter stating that we are not
getting approval and that therefore they - -no
have
interest - - leases and only the obligation -
in the of
Montana and Union to pay 5% of the gross income.
Under this procedure the question arises as to
whether thisLmight be considered a transfer of an
interest in the leases which could be used as a
basis by the Government for claiming forfeiture of
the leases; or
"2nd. Get approval of the Department. Bert thinks
there is no possiblity of doing this.
"Bert believes that if we follow Plan No. 1 and if
that is agreeable to the Reagan. Associates there is
probably no great risk from a practical
sta-nd-point; that his information from Frary and
others is that this is not an unusual procedure.
"Union is willing to go along with Plan No. 1, set
forth above, without any approval by the Tribal
Counsil or the Department of the Interior."
(Emphasis supplied).
Thereafter, the agreement of October 18, 1954, was
executed by the Reagan Associates, acting through attorneys
in fact, the Union Oil Co. and the Montana Power Co. Under
the written agreement, the Reagan ~ssociates released and
quit-claimed forever their interest in the net proceeds
[profits] in the leases, and accepted instead "a genera1
obligation and. liability of Union and Montana" measured by an
amount equal to 5% of the value of the oil produced and saved
from the Union and Montana lands. The general obligation and
liability continues in force as long as the oil and gas
Leases remain in effect. The agreement further provided that
the Reagan Associates would d.ivide the 5% general obligation
and liability among themselves in proportion to their
ownership of the 20% net profits interest.
When District Judge Frank E. Blair granted a summary
judament in favor of Barney Reagan in this case, he did so on
the ground that no material issue of fact existed, and that
"as a matter of law the written contract of the parties of
October 1 8 , 1954, c r e a t e d a g e n e r a l o b l i g a t i o n and l i a b i l i t y
of Union O i l and Montana Power and n o t any economic i n t e r e s t
w i t h r e s p e c t t o t h e o i l o r g a s i n p l a c e i n t h e ground. This
i s f a t a l t o Defendants c o n t e n t i o n s . "
D i s t r i c t Judge Frank E . B l a i r was i n d u b i t a b l y c o r r e c t .
His f i n d i n g i s a b s o l u t e l y i n a c c o r d w i t h t h e t e r m s of the
agreement o f October 1 8 , 1954, a l l o f which p r o v i d e t h a t i t
i s a g e n e r a l o b l i g a t i o n and l i a b i l i t y of t h e two companies,
E)
and which p r o v i s i o n s i n c l u d e a r e l e a s e and q u i t - c l a i m forever
the net profits interest of the Reaqan Associates. The
r e a s o n s f o r t h e agreement a r e c l e a r from t h e communications
between the Elontana Power Co., its attorneys, and
representatives. By creating a general obljgation and
l i a b i l i t y i n s t e a d of an o v e r r i d i n g r o y a l t y i n t e r e s t i n t h e
l e a s e d l a n d s , t h e p a r t i e s a v o i d e d t h e n e c e s s i t y of s u b m i t t i n g
t h e agreement f o r a p p r o v a l t o t.he t r i b e and t o t h e S e c r e t a r y
of t h e I n t e r i o r .
There i s no a m b i g u i t y i n t h e agreement of O c t o b e r 1 8 ,
1954. The i n t e n t of the parties i s c l e a r t h a t a general
o b l i g a t i o n and l i a b i l i t y a g a i n s t Montana Power Co. and Union
O i l Co. was created. The Reagan Associates under the
agreement s t a n d i n t h e p o s i t i o n of g e n e r a l c r e d i t o r s o f t h e
corporations. Because o f t h e i r r e l e a s e and q u i t - c l a i m , they
are not the owners of any economic interest, overriding
royalty interest or other interest in the o i l and g a s in
place, o r produced and saved from t h e t r i b a l l a n d s l e a s e d .
D e f e n d a n t s , Montana Power Co. and Union O i l Co. however,
have managed t o o b f u s c a t e t h e c l e a r i s s u e f o r t h e m a j o r i t y of
this Court, by r a i s i n g t h e s p e c t e r of the division orders
signed by Barney Reagan. I use the term "specter" here
b e c a u s e t h o s e p e r s o n s who have o b s e r v e d such b e i n g s r e p o r t
t h a t t h e y a r e s o e t h e r e a l t h a t t h e y a-re e a s i l y s e e n t h r o u g h .
Barney Reagan, the plaintiff here, is the son o f Ed
Reagan, one of the attorneys - in-fact who executed the
inst-rument h e r e , and of c o u r s e , one o f t h e Reagan A s s o c i a t e s .
Barney Reagan succeeded t o t h e i n t e r e s t o f Ed Reagan i n 1969.
I n March of 1970, h e s i g n e d d i v i s i o n o r d e r s f o r t h e Union O i l
Co. relating to t h e d i v i s i o n of interest t o which h e was
d
entitled, 16.668 of 5 % 'of t h e whole i n t e r e s t . It is the
contention of the defendants that the language of the
division orders show that Barney Reagan i s an o v e r r i d i n g
royalty interest owner, and n o t a g e n e r a l c r e d i t o r o f the
companies i n v o l v e d .
Each o f t h e d i v i s i o n o r d e r s , s u b m i t t e d by Union O i l t o
Barney Reagan, contained the language that the signer
c e r t i f i e s 2nd w a r r a n t s t h a t h e i s "the l e g a l owner i n t h e
p r o p o r t i o n s s e t o u t below o f a l l t h e o i l , and i n t h e p r o c e e d s
from casinghead gas produced from Union's lease" on the
t r i b a l s lands. The d i v i s i o n o r d e r h a s o t h e r p r i n t e d l a n g u a g e
on i t which i s m a t e r i a l . I t provides t h a t t h e o i l received
under t h e d i v i s i o n o r d e r s h a l l be p a i d f o r by t h e p u r c h a s e r
(in this case Union) in accordance with the djvision of
interest shown on the face of the division order; the
d i v i s i o n o r d e r i s r e v o c a b l e by e i t h e r p a r t y upon t h i r t y d a y s
notice; revocation by Barney Reagan, however, would not
c o n s t i t u t e r e v o c a t i o n by any o t h e r o f t h e Reaga-n A s s o c i a t e s .
The m a j o r i t y a r e c o m p l e t e l y i n e r r o r t h a t t h e l a n g u a g e
of t h e d i v i s i o n o r d e r can b e used t o supplement t h e t e r m s of
the 1954 agreement or to constitute a representation of
ownership o f t h e o i l and g a s by Reagan.
First, under the agreement of October 18, 1954, the
Reagan Associates forever release and quit-claimed their net
profits interest in the oil and gas leases. No matter what
Barney Reagan warranted or represented in the division order,
he cannot become an owner of an overriding royalty interest
in those 1ea.ses unless there is an instrument deeding back to
him from Un.ion and Monta.na Power Co. such an interest. None
appears here.
Secondly, the ma-jority miss or confuse the purpose of a
division order.
"A division order is an instrument prepared by the
purchaser of oil and gas which directs to whom and
in what proportion the purchase price is to be
paid. Primarily, it is for the protection of the
purchaser of the oil. . .
" Sullivan, Handbook of
Oil and Gas Law (1955), p. 140
And Sullivan further states:
". . .A division order is separate and distinct
from a conveyance of unaccrued royalty. It merely
directs to whom payments should! be made for oil
that has already been produced.. A division order
does not supersede the lease by operating 2s a
novation as to the royalty." ~uflivan,supra, pp.
141-142.
(Sulliva.n, it should be noted, served for many years as Dean
of the Law School at the University of Montana. He then
became Vice-President and General Counsel of M0nta.n.a Power
Co. He did not participate in this case.)
Sullivan is of course in accord with the law on the
purpose and effect of division orders. Such instruments
determine who is entitled to payment for the sale and
purchase of oil and gas, and in what proportions. As stated
in Phillips Petroleum Co. v. lililliams (5th Cir. 1946) 158
"As to contention one, the division and transfer
orders, with their definite declaration that the
market value of the gas at the mouth of the well is
to be the measure of lessors' rights and lessee's
obligations, and their clear and full provision for
precisely arriving at the value, we agree with
defendant, that, until withdrawn or modified, they
constitute the precise and definite basis for
payments, and payments made in accordance with them
are final and binding. The very existence of this
and the numerous other litisations which have
arisen over the meaning and effect of market price
or rate provisions and over what was the market
price or value of the gas, and the fact that these
agreements fix, as due, sums which may from time to
time be more or 1-ess than the prevailing market
price, give full support to and make binding
~avmentsand settlements made thereunder. Bindins
as'^thev are. however. in res~ectof ~avmentsmade
- d -
and accepted under them7thesg diviso;s -
>r transfer
orders did not rewrite or supplant the lease
contract7~hr are bindinsonly for thetime and
to the extent4th.at they h>.ve been, or are being
-
acted on and made the basis of settlements and
payments. .. l1
In Maddox v. Gulf Oil Corp. (Kansas 1977), 222 Kan. 733, 567
P.2d 1326, 1 3 2 8 it is said:
". . .The insertion in the division orders of
matters contrary to the oil and gas leases, or
contrary to the law, cannot be unilaterally imposed
upon the lessor by the lessee or the purchaser.
Here the unilateral attempt by Gulf in the division
orders to amend the oil and gas leases, and thereby
deprive the royalty owners of interest to which
they were otherwise entitled, was without
consideration. Therefore, the provisions of the
division order regarding waiver of interest are
null and void as determined by the trial court."
It is therefore clear from the cases the division orders
signed by Barney Reagan could have no legal effect on his
rights under the agreement of October 1 8 , 1954. Therefore no
material issue of fact exists with respect to those division
orders. Judge Blair's summary judgment ought to be affirmed
We join in the dissent of Justice John C. Sheehy.
,?
I