Reagan v. Union Oil Co. of California

                                               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


         J 1':
            a          .
                 t ixk \
                           j   :$d6
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