Gunnip v. Continental Oil Co.

No. 85-321
IN THE SUPREME COURT OF THE STATE OF MONTANA
1986

FRANK A. GUNNIP, Receiver of
McDonald & Eide, Inc., a corp.,
GENE HUNTLEY and ROBERT P. SCHWINN,
Plaintiffs and Appellants,

CONTINENTAL OIL COMPANY, a corp.,
and SHELL OIL COMPANY, a corp.,
Defendants and Respondents.

APPEAL FROM: District Court of the Sixteenth Judicial District,
In and for the County of Fallon,
The Honorable Nat Allen, Judge presiding.

COUNSEL OF RECORD:

For Appellant:
Huntley & Eakin; Gene Huntley argued, Baker, Montana

For Respondent:
Moulton, Bellingham, Longo & Mather; William
Bellingham, Billings, Montana (Shell Oil)
Ms. E.V. Gross argued for Shell Oil, Houston, Texas
Crowley Law Firm; Carolyn Ostby argued for Continental
Oil, Billings, Montana

Submitted: May 13, 1986
Decided: September 9, 1986

Filed: SEP9-1986

Clerk
Mr. Justice Frank B. Morrison, Jr. delivered the Opinion of
the Court.

Plaintiffs appeal the April 25, 1985, order of the
Sixteenth Judicial District Court granting summary judgment
in favor of defendants. We reverse and remand.
This action was brought by plaintiffs to secure an
additional 1/8 of the proceeds from a producing oil well in
Fallon County, Montana. The lease (Lease) in dispute covers
the NW& of Section 8, Township 7 North, Range 60 East, and
has been the subject of litigation twice previously. A brief
history of the chain of title is in order.
Prior to July 1955, McDonald & Eide, Incorporated (M &

E) owned the entire working interest in the Lease. At all
times, the Lease has been subject to a 12.5% landowner royal-
ty and a 3% overriding royalty; these royalty interests are
not in dispute. On July 12, 1955, M & E assigned 100 per-
cent of its interest in the S% of the NW% and 50 percent of
its interest in the N% of the NWg to H. W. McDonald.
McDonald did not record this assignment until May 15, 1963.
On January 22, 1958, M & E's corporate charter was
repealed for failure to pay taxes. Under Delaware law, the
corporation had three years to wind up its business. On June
1, 1961, corporate officers of M & E purported to assign M &

E's total working interest in the Lease to Vernon Eide and

Jacob Von DeLinde. This assignment conflicted with the one
previously made to McDonald.
Shortly thereafter, Continental Oil Company (Continen-
tal) began negotiations with Eide & Von DeLinde to purchase
the Lease. Recognizing that McDonald had filed a quiet title
action against Eide and Von DeLinde concerning the Lease,
Continental sought McDonald's participation in the deal. On
May 22, 1962, Eide & Von DeLinde assigned an undivided 4
interest in the Lease to Continental. On May 24, 1962,
McDonald signed an agreement ratifying the assignment from
Eide & Von DeLinde to Continental of an undivided * interest
in the Lease. The ratification agreement provided in part,
... the undersigned, H. W. McDonald,
does hereby ratify, adopt and confirm
said assignment, in all things with the
same force and effect as if the under-
signed had been named the assignor there-
in and had duly executed and delivered
said assignment to Continental Oil
Company.
For the same consideration, the under-
signed does hereby transfer, assign, set
over and convey unto Continental Oil
Company an undivided one-half (4) inter-
est in the oil and gas lease above de-
scribed ...
On March 20, 1964, while McDonald's quiet title action
was still pending, McDonald made the following assignments:
to Gene Huntley 50 percent of his interest in the S+ of the
NW% and an undivided 50 percent interest in the N+ of the
NW%; to Donald Iverson 25 percent of his interest in the S+
of the NW& and an undivided 25 percent interest in the N+ of
the NW%; to Alvin Larson 25 percent of his interest in the S+
of the NW% and an undivided 25 percent interest in the N+ of
the NW%. Each of these assignments included a provision that
the intent of the assignment was to convey to the assignee
the respective share of moneys "held in suspense by
Continental Oil Company."
On June 16, 1964, final judgment no. 3679 was entered in
McDonald's quiet title action against M & E, Eide, Von
DeLinde and Continental. The judgment quieted title in the
Lease in McDonald to the extent of 50% of the N$ of the NW%j
and all of the S+ of the NW%, yet held McDonald's interest
subject to the ratification agreement with Continental. The
interests of Huntley, Iverson, and Larson were not addressed
by the judgment.
 On May 28, 1965, the stockholders of M & E appointed
Frank Gunnip as receiver for M & E. On February 23, 1967,
Gunnip sued M & E and its corporate officers to recover the
Lease and other property. Findings of fact and conclusions
of 1-aw were entered by the trial judge on December 21-, 1970,
ruling that the conveyance in 1961 of the Lease from M & E to
Eide and Von DeLinde was voided in its entirety. Final
judgment was delayed for several years due to interim pro-
ceedings providing for payment to parties who had developed
the Lease. On January 7, 1976, final judgment no. 4062 was
entered, providing that Gunnip was owner of a one-half inter-
est in the N$ of the NW%; defendants Eide, Von DeLinde and
Continental were held to have no interest in the Lease.
Shell Oil Company, responsible for disbursing the pro-
ceeds from the Lease, continued to pay Continental $ of the
proceeds based upon Continental's assertions that it was
entitled to that fraction. Continental continued to claim a
50 percent interest under the ratification agreement with
McDonald. Although judgment no. 4062 held that Gunnip was
owner of a 50 percent interest in the N$ of the NW%, Shell
was paying him an amount equal to a 25 percent interest.
On October 6, 1981, Gunnip assigned a 3.75 percent
interest in the N4 of the NW& to Huntley, and a 2.5 percent
interest in the N$ of the NW% to Robert Schwinn.
Huntley became aware that Gunnip was not receiving his
full share, and following demands for payment, Gunnip,
Huntley and Schwinn filed suit requesting an additional 1/8
of the proceeds from the Lease. Following summary judgment
motions from both parties, summary judgment was granted in
favor of Continental by order dated April 25, 1985.
The sole issue on appeal is whether the District Court
erred in granting Continental's motion for summary judgment.
 Rule 56(c), M.R.Civ.P. provides that summary judgment
shall be granted when the record discloses no genuine issue
of material fact and that the moving party is entitled to a
judgment as a matter of law. A review of the record before
the District Court in this case reveals fact issues which
must be resolved.
Continental asserts it is entitled to a 50% interest in
the N+ of the NWg of the Lease under the ratification
agreement with McDonald. However, Continental admits in its
brief that it did not adopt this position at the time the
ratification agreement was executed in 1964; prior to the
time judgment no. 4062 was entered, Continental derived a 25%
interest in the N 4 of the NW% from the Eide and Von DeLinde
conveyance and a 25% interest under the ratification
agreement. Judgment no. 4062 voided the conveyance from M &

E to Eide and Von DeLinde in its entirety, thereby
eliminating the 25% interest Continental claimed under
assignment from Eide and Von DeLinde. Following judgment no.
4062, Continental continued to assert a 50% interest under
the ratification agreement with McDonald.
There remain unresolved issues of material fact regard-
ing the interest of Continental. Although McDonald conveyed
an "undivided one-half interest" in the Lease under the
ratification agreement, Continental admits in its brief that
it did not treat its 50% interest in the N 4 of the NW% as
being derived solely from McDonald until judgment no. 4062
was entered. In 1964 McDonald assigned undivided interests
to Huntley, Iverson, and Larson. Huntley, Iverson and Larson
have claimed under this assignment adverse to the interest
Continental now claims under the ratification agreement. A
trial must be held to assess Continental's interest
 considering potential application of adverse possession,
waiver and estoppel.
The court cannot decide Continental's interest under
McDonald's ratification agreement without McDonald's
assignees before the court. They must be joined on remand.
Continental's asserted 50% interest in the N+ of the
Lease must be tested against the interest of McDonald's
assignees and their successors in interest. The order of the
District Court awarding summary judgment to Continental is
reversed. The matter is remanded for further proceedings in
accordance with this opinion.

We Concur:

f
4
.
7
;-
Chief Justice Y

Justices

J,@-L&sD
(/d
32
Honorable Frank I. Haswell,
Retired Chief Justice, sit-
ting in place of Mr. Justice
L. C. Gulbrandson
Justice John C. Sheehy, dissenting:

I dissent.
The bone of contention in this law suit is Continental's
argument that it now owns all of McDonald's undivided one
half interest in the leasehold as it pertains to the N$ of
the NW% of Section 8, Twn 7 N, R 60 E, in Fallon County
Montana.
I agree that the District Court should be reversed, but
it is my view that we should order a summary judgment in this
case in favor of Gunnip and his assigns to the effect that
Gunnip and his assigns are entitled to 25% of the working
interest in the NWg Section 8, Twn 7 N, R 60 E.
We should further order a summary judgment to the effect
that Continental Oil Company is entitled to 37.5% of the
working interest in the said NW% of Section 8.
We shoul-d further order a summary judgment that the
remaining 37.5% of the working interest in the said NW% is
owned by McDonald and his assigns.
The working interest is 84.5% of 100% of production.
General Observations
None of the parties that are involved in this action
owns a fee simple title either to the land or minerals. The
quarrel in this lawsuit is about the division of the
leasehold interest. The res of the lawsuit is the original
lease, which had to be kept in force by the lessees, either
by development of an oil and gas well or by the payment of
delay rentals. We do not have the terms of the original
lease before us. We only know from reference in the
instruments that an oil and gas lease to the whole of the N$
of Section 8 (including the NW% and the NE%) was given by
William p. Knox, a single man, and Mrs. Marsha Know Orrock
and her husband, Robert Orrock, to a Frank H. Becker. Becker
apparently assigned the full leasehold interest, subject to
the landowners royalty and a 3 % overriding royalty to
McDonald and Eide, Inc., a corporation, before the
commencement of the matters involved this lawsuit.
After Continental drilled, and oil and gas was produced
in commercial quantity on the leasehold, the Monta.na Oil and
Gas Commission adopted 160-acre spacing rules for the area.
This means that the NW% of the section is treated as one
spacing unit, and the NE% of the section is treated as a
separate spacing unit, even though both of these quarter
sections were included in the leasehold interest owned by
McDonald and Eide, Inc. For the purposes of this lawsuit, we
are interested only in the leasehold interests in the NW%.
Since the spacing unit is 160 acres, a person owning
either land or a leasehold interest under the area of the NW%
is entitled to share in the proceeds from any oil or gas
produced in the NW% in the proportion that either his
landowner's royalty ownership, overriding royalty ownership,
or lease ownership bears to 160 surface acres. The
denominator is always 160 surface acres.
Facts
The facts in this case must be stated more clearly.
On June 1, 1961, McDonald and Eide, Inc., then the
record owner of the leasehold interest, but subject to the
landowners royalty and a 3 % overriding royalty, ostensibly
assigned all of its interest in the oil and gas lease to
Vernon M. Eide and Jay Von DeLinde (hereafter Eide and Von
DeLinde) in the N% of Section 8, Twn 7 N, R 60 E. This
assignment was recorded and as far as the record title is
concerned, indicated tha.t Eide and Von DeLinde were the
successors in interest to all of the interests of McDonald
and Eide, Inc., in the oil and gas lease. Thus, Eide and Von
DeLinde were the ostensible owners of all of the working
interest; in other words after deducting royalty interests,
Eide and Von DeLinde were the owners of 84.5% of 100% of the
oil and gas rights of the land involved.
However, on July 12, 1955, prior to the ostensible
assignment to Eide and Von DeLinde, the corporation McDonald
and Eide, Inc., had assigned to H. W. McDonald, a portion of
the leasehold interest in the following language:
. . . all of its right, title and interest of the
original lessee and present owner in and to said
lease and rights thereunder, insofar as it covers
the south half of the north west quarter (S+ and
NW%) of Section 8, Twn 7 N, R 60 E, and 50% of its
interest undivided in the north half of the north
west quarter (N% of the NW%) of Section 8, Twn 7 N,
R 60 E, subject also to the 3% overriding royalty
reserved ...
Note that the description in the assignment from the
corporation to McDonald related only to the leasehold
interest in the NW$ of the section, and that - - -
it was an
assignment - - interest - - lease.
of an in the Under the rules
relating to 160-acre spacing units, McDonald thereby became
the owner of 120/160, or 75% of the working interest in the
whole of the NW%.
Since McDonald became entitled to 75% of the working
interest under the NW% of the leasehold, it follows that the
assignor, McDonald and Eide, Inc., still held the remaining
258 of the working interest in that quarter section.
H. F?. McDonald did not immediately file for record in
Fallon County the assignment from McDonald and Eide, Inc., to
him of a portion of the leasehold interest.
 Enter Continental Oil Company in 1962. On February 27,
1962, it entered into a farmout agreement with Eide and Von
DeLinde, (as record owners of the whole of the leasehold
interest) covering the N* of Section 8, Twn 7 N, R 60 E,
subject to the overriding royalty.
A farmout in the oil business occurs when the holders of
the leasehold interest farmout to another the obligation to
drill a well. The consideration in this case was 50% of the
working interest in the lease.
Under the terms of the farmout agreement with
Continental, Eide and Von DeLinde agreed to assign to
Continental and "undivided one-half interest in and to the
said lease insofar as it covers said lands."
In accordance with the farmout agreement, Eide and Von
DeLinde did, on May 22, 1962, make an assignment to
Continental Oil Company of "an undivided one-half of that
certain oil and gas lease" covering the N$ of the said
Section 8. Eide and McDonald further provided:
Assignee [Continental] agrees to bear and pay an
undivided one-half (1%) of the land owner's royalty
and of the overriding royalty not in excess of
three percent (38) burdening the above described
lease.
Somehow the record before us does not show how
Continental Oil learned that H. W. McDonald had an interest
in the leasehold. The interest of H. W. McDonald, of course,
arose from the aforementioned assignment of July 12, 1955,
wherein McDonald and Eide, Inc., had assigned to H. W.
McDonald 100% of its leasehold interest in the S% of the NW%
of Section 8, and an undivided 4 interest of its leasehold
interest in the N+ of the NW% of Section 8. Although this
assignment was made in 1955, McDonald had not recorded the
instrument and did not record it until the 1960's. Thus when
Continental did its title work on the farmout from Eide and
Von DeLinde, the courthouse records did not ind.icate the
McDonald interest in the leasehold.
On learning of the possible McDonald claim to a portion
of leasehold interest, Continental obtained from H. W.
McDonald a "Ratification and Adoption of Assignment" in
accordance with the assignment that it had already obtained
from Eide and Von DeLinde. Such a written instrument was
executed by McDonald on May 24, 1962, and by it McDonald
ratified and confirmed the Eide and Von DeLinde assignment,
and went on to say:
For the same consideration, the undersigned does
hereby transfer, assign, set over and convey onto
Continental Oil Company an undivided one-half
interest -the oil and gas lease above described
in - - -
and - - leasehold estate created thereby on the
in the
same terms and conditions as are set forth in the
assignment attached hereto and marked exhibit "A."
(Underlines ours. )
Thus, in May of 1962, Continental thought it had covered
all the bases. It had a farmout agreement and assignment
from Eide and Von DeLinde for a 50% interest in the leasehold
for all of the N$ of Section 8, and at the same time it had a
ratification and adoption of assignment from McDonald for the
same acreage in case it developed that McDonald did in fact
own an interest in the leasehold by virtue of an unrecorded
instrument. Continental could relax and go ahead with its
drilling program, which it did, and after a well was
successfully developed, it felt safe enough to enter into an
operator's agreement with Eide and Von DeLinde.
The operating agreement was made after the successful^
well was drilled and was dated September 25, 1962. The
parties are Continental Oil Company and Eide and Von DeLinde.
The instrument describes that Continental has a 50% interest
in the leasehold, and contains the following provision in
case of failure of title:
20. Failure of title. In the event of the failure
or partial failure of title to any interest subject
hereto, the loss of any such title or titles shall
- borne proportionately in accordance with the
be
respective undivided interests of the parties in
the lease title to which fails [sic] and no party
shall be liable to any other for the loss of any
such title.
The roof fell in for Continental Oil Company, as far as
Eide and Von DeLinde are concerned, when the District Court
in Fallon County determined on December 18, 1970, that the
purported assignment to Eide and Von DeLinde from McDonald
and Eide, Inc. (the assignment of June 1, 1961,) was void for
several reasons. By virtue of that judgment any claim of
Continental to a portion of the working interest through Eide
and Von DeLind.e failed. The interest in the leasehold that
was purportedly held by Eide and Von DeLinde was vested by
the District Court judgment in Frank Gunnip, as receiver for
the corporation, McDonald and Eide, Inc. Continental holds
no lease or instrument of any kind signed by Gunnip, his
predecessors, or successors that would now serve to limit
Gunnip's interest. The judgment means that Gunnip and his
assigns are the sole owners of the working interest in the
NE% of Section 8. It further means that Gunnip and his
assigns are the sole owners of an undivided one-half of the
working interest in the N% of the NW% of Section 8. Since
Gunnip and his assigns own an undivided one-half of the
working interest in the N4 of the NW% of the leasehold, his
leasehold interest in that tract is 40 surface acres of
working interest. The proportion of 40 over 160 equals 25%.
Gunnip and his assigns are entitled to that amount of working
interest irrespective of any other result in this lawsuit.
 The remaining interest in the NW% is owned by H. W.
McDonald and his assigns, but subject to the terms of the
ratification and adoption of assignment that McDonald had
signed for Continental on May 24, 1 9 6 2 .
After the 1 9 5 5 assignment from McDonald and Eide, Inc.,
H. W. McDonald owned all of the working interest in the S $ of
the NWk of Section 8 , and an undivided one-half of the
working interest in the N$ of the NW% of said section.
Continental claims that under the ratification agreement
signed with McDonald, it is entitled to 5 0 % of the working
interest under the S$, and - of McDonald's working interest
all
in the undivided one-half of the N$ of the quarter section.
Because McDonald's interest in the N% is only an undivided
one-half, Continental claims that under its ratification and
adoption of assignment agreement with McDonald, it became the
owner of 100% of McDonald's interest in the N$ of the quarter
section.
The fallacy of Continental's position can be shown in
two ways: One, the ratification and assignment signed by
McDonald (and by Eide and Von DeLinde) did not constitute nor
was it intended to constitute a transfer of the surface acres
underlying the lease. Rather it was a transfer of a
percentage interest in a leasehold, the lease which is res of
this lawsuit, an interest which may be calculated by
reference to the surface acres. Two, if Eide and Von DeLinde
had in fact a valid ownership of an undivided one-half
interest in the N$ of the quarter section, and H. W. McDonald
owned the other undivided one-half interest, under
Continental's position, Continental would have earned from
the two sources 1 0 0 % of the working interest in the N$ of the
quarter section by virtue of its farmout agreement and the
assignments. This is absurd.
Giving effect to the intention of the parties,
Continental, through the farmout and assignments, could only
have earned 5 0 % of the leasehold interest validly held by the
parties with whom it contracted. The result is that with
respect to the NW%, Continental owns 5 0 % of the working
interest underlying the S4 of the NW%, and 2 5 % of the
underlying leasehold in the N$ of the said quarter section.
Reduced to acreages and percentages, of the 8 0 surface
acres underlying the S$ of the quarter section, Continental
owns 40 acres of working interest. Of the 40 surface acres
representing an undivided one-half interest in the N4 of the
quarter section, Continental owns 20 acres of working
interest. It therefore owns a total of 6 0 / 1 6 0 surface acres
in the NW& or 37.5% of the working interest.
The interest of H. W. McDonald in the NW% is subject to
subsequent assignments. Those assignments are of record, and
there is no contest before us as to the propriety of those
assignments. A further lawsuit is not necessary in order to
determine those interests and the remand by this Court to
determine those interests is quite unnecessary.
There is no need for further extended litigation in this
case. There should be no quarrel about the interests of the
assigns under Gunnip, nor of the assigns under McDonald's
37.5% interest. All that should be left for the District
Court to do, in my view, would be to require an accounting
and make appropriate division of the monies held back and to
be earned. I would so order.

Justice
Mr. Justice John C. Harrison:
I join in the dissent of Mr. Justice Sheehy.