The question before us is this: May the grantee of a landowner's royalty in oil lands holding by an instrument duly *Page 443 acknowledged and recorded lose his rights by tax sale proceedings against the grantor, owner of the land, and to which the grantee was not a party and had no notice?
It seems to me the answer to the question depends upon whether the grantee has what may be called a mineral interest in the land which must be assessed, if at all, to him and to no one else, or whether the recorded royalty interests are to be reduced to the level of scraps of paper. It must, of course, be conceded that oil is a mineral and an oil well a mine. Mid-Northern Oil Co. v. Walker, 65 Mont. 414, 211 P. 353. It is also well settled, and my associates concede, that separate divisible interests in a mine or mining claim may be created. Homestake Exploration Co. v. Schoregge, 81 Mont. 604, 264 P. 388. It is also well settled that a person cannot be taxed upon property which he does not own. Northern P. Ry. Co. v. Musselshell County, 74 Mont. 81,238 P. 872; Western Ranches v. County of Custer, 28 Mont. 278,72 P. 659; Homestake Exploration Co. v. Schoregge, supra.
It is my contention that the owner of a landowner's royalty in oil lands has an interest in a mine or mining property which must be assessed to him, if assessed at all, and that he may not be divested of his interest by an assessment of the land to the original owner who has parted with such royalty interest.
My associates seem to concede that this would be the rule if the landowner's royalty actually conveyed the oil in place but draw a distinction in this case because of the wording of the conveyance which is a stated percentage of the "royalty of and on all of the oil and gas and other minerals produced and saved" from certain lands. I concede that royalty after it has been produced is personal property, but my belief is that royalty which is the right to receive a certain percentage of the oil from certain described lands, Byrne v. Fulton Oil Co., 85 Mont. 329,278 P. 514, is an interest in those lands — a mineral interest and an interest that constitutes real property. Denver Joint Stock Land Bank of Denver v. Dixon et al., 57 Wyo. 523,122 P.2d 842, 140 A.L.R. 1270. *Page 444
What possible difference is there in a grant of five per cent of "all oil in and under certain described land" and five per cent of "all oil produced and saved from" the same land? The grantee would have no greater right in the one case than in the other. In each instance the grantee obtains only the right to receive the oil when it is captured and brought to the surface. But if one is actually different from the other, the one who has five per cent "of all oil produced and saved" has a more valuable right than the one who has five per cent of "all oil in place" because the latter must bear his proportionate share of the cost of extracting and marketing the oil. Marias River Syndicate v. Big West Oil Co., 98 Mont. 254, 38 P.2d 599, while apparently the former does not.
My associates stress the definition of "royalty" and point out that it is a privilege a prendre but they overlook what this court said in Williard v. Federal Surety Co., 91 Mont. 465,8 P.2d 633, 635:
"`Profit a prendre' is defined as `the right to take a part of the soil or produce of the land. A right to the products or proceeds of land. This right, if enjoyed by reason of holding another estate, is regarded as an easement appurtenant to the estate; whereas, if it belongs to an individual, distinct from ownership in other lands, it takes the character of an interest or estate in the land itself, rather than that of a proper easement.' Anderson's Dictionary of Law, p. 822. It is an interest in land (Summers on Oil Gas, p. 169), although incorporeal (Gas Products Co. v. Rankin, supra).
"In our opinion the right of a lessee to take oil or gas stratum from its place and convert it to the lessee's own use is an interest in real estate within the meaning of section 9262 of the Revised Codes 1921, relative to the attachment of real estate. Graciosa Oil Co. v. Santa Barbara County, 155 Cal. 140,99 P. 483, 20 L.R.A., N.S., 211."
This was reiterated in Marias River Syndicate v. Big West Oil Co., supra [98 Mont. 254, 38 P.2d 601], where we said: "The right to take a profit from the lands of another *Page 445 within the common-law classification may be regarded as a profit a prendre. Homestake Exploration Corporation v. Schoregge, supra. This right, if it belongs to the individual distinct from the ownership in other lands, takes the character of an interest or an estate in the land itself. It is an interest in the land, although incorporeal."
My associates, I think, are in error in supposing that there can be no severance of separate mineral interests without a grant of part of the minerals in place. I think a mineral interest may be conveyed without conveying minerals in place. It is the right to receive the stated royalty that constitutes an interest in real estate. As was said by the United States Supreme Court, speaking through Mr. Justice Washington, in Green v. Biddle, 8 Wheat. 1, 76, 5 L.Ed., 547: "A right to land essentially implies a right to the profits accruing from it, since, without the latter, the former can be of no value. Thus, a devise of the profits of land, or even a grant of them, will pass a right to the land itself. Shep. Touch. 93; Co. Litt. 4b. `For what,' says Lord Coke, in this page, `is the land, but the profits thereof.'"
In Drusadow v. Wilde, 63 Pa. 170, the court said: "But there is no construction of words older and better settled than that a grant or devise of the profits of land passes the land itself."
In Toothman v. Courteney, 62 W. Va. 175, 58 S.E. 915, 918, it was said: "Though he did not reserve by name the oil in place, or any part of it, his reservation of all the rental or royalty to be derived from it compels the court to hold, by construction of the instrument, that it vests in him the title to that thing, the beneficial use whereof has been reserved, namely, the oil in place."
In Weakland v. Cunningham, 7 A. 148, 3 Sad., Pa., 519, it was said: "The following reservation in a deed: `Excepting the profits of one-half of all the stone coal, and of all other kinds of mineral, which may be discovered at any time hereafter,' — is a reservation of the corpus of all such coal and mineral in place." *Page 446
In Updegraff v. Blue Creek Coal Land Co., 74 W. Va. 316,81 S.E. 1050, it was held that a reservation of oil and gas royalties was a reservation of the oil and gas in place.
In Paxton v. Benedum-Trees Oil Co., 80 W. Va. 187,94 S.E. 472, 475, the court said: "We are clearly of the opinion that the grant of one-half of the royalties, rents, and income from the oil is a grant of one-half of the oil in place." That, in effect, is what was held in Marias River Syndicate v. Big West Oil Co., supra. The particular reservation involved in the latter case read as follows: "Reserving unto the said parties of the first part a 12 1/3 per cent. interest and royalty in and to all oil and gas and other minerals of whatsoever nature, found in or located upon or under said land or premises above described, or that may be produced therefrom." There is nothing in that reservation that suggests retention of title to oil or gas in place and yet that is what this court said it meant.
A covenant to give to a lessor a portion of all oil as rent or royalty is a covenant running with the land. Akin v. Marshall Oil Co., 188 Pa. 602, 614, 41 A. 748; Fennell v. Guffey, 139 Pa. 341,20 A. 1048; Edmonds v. Mounsey, 15 Ind. App. 399, 44 N.E. 196; Swiss Oil Corporation v. Dials, 232 Ky. 298, 22 S.W.2d 912. That is the effect of the holding in Aronow v. Bishop, 107 Mont. 317,86 P.2d 644. And a royalty interest retained by a lessor is an estate in land. Taylor v. Higgins Oil Fuel Co., Tex. Civ. App., 2 S.W.2d 288; Broderick v. Stevenson Consol. Oil Co., 88 Mont. 34, 290 P. 244; Homestake Exp. Co. v. Schoregge, supra; Marias River Syndicate v. Big West Oil Co., supra.
A case which I think is parallel to this is that of Shaw v. Watson, 151 La. 893, 92 So. 375, 376, where the landowner held a "sixteenth of the oil produced from an area of 1,275 acres, and the right to receive a thirty-second of the oil produced from the remaining area of 700 acres." The assessor taxed him on the whole oil-producing value including the value of *Page 447 mineral rights belonging to others. The court held this was improper, saying:
"The royalty interest of a landowner in oil-producing land is a part of his interest in the land. There is no reason why the royalty interest of the landowner should be assessed separately from his interest in the land for any other value that it has. But a sale of a landowner's royalty interest in oil-producing land, or a sale of his mineral rights, either in whole or in part, is a conveyance of a part of his ownership of the land. And it makes no difference, in that respect, whether a conveyance of the mineral rights be styled a sale or a lease.
"The main argument of the appellants in this case is that an assessment of land for taxes is a proceeding in rem, and that every element of its value should be included in the assessment. There is no dispute about that. But it does not follow that elements of value not owned by the owner of the surface should be assessed to him, or added to the assessment of the surface to him.
"It is argued that a transfer of a landowner's mineral rights, either in whole or in part, whether in the form of a sale or a lease, is nothing more than the imposing of an incumbrance upon his land, like a mortgage, or an ordinary lease for occupancy or cultivation. Our opinion is that a landowner's sale of his mineral rights cannot be compared, in that respect, with his mortgaging his land, or subjecting it to an ordinary lease for occupancy or cultivation. It is settled in this state that a sale of a landowners right to the oil or gas beneath his land is an alienation of a real right, which, with regard to the prescription by which such rights are released, is classed as a servitude upon the land. Frost-Johnson Lumber Co. v. Salling's Heirs [150 La. 756], 91 So. 207. Such a right, of course, is incorporeal property, in the category of immovable property or real estate. Strother v. Mangham, 138 La. 437, 70 So. 426; Hanby v. Texas Co., 140 La. 189, 72 So. 933. A sale of a land owner's mineral rights, either in whole or in part, is therefore an alienation of a part of his interest in the land. It is a dismemberment *Page 448 of his ownership, as held in Frost-Johnson Lumber Co. v. Salling's Heirs. In that respect it is more like a sale of an undivided interest in the land than like the imposing of a mortgage or an ordinary lease upon the land. A mortgage or an ordinary lease is not a transfer of any element of ownership in the property mortgaged or leased. For that reason mortgages and ordinary leases are not subject to taxation by the Revenue Law (Act 170 of 1898). The distinction between them and a conveyance of mineral rights in the form of a lease is recognized by the courts of other states. (Citing cases.)"
To the same effect is Humble Oil Refining Co. v. State, Tex. Civ. App., 3 S.W.2d 559, which case draws attention to the fact that the several mineral interests are taxable to the several owners, each to the extent of his interest after the mineral estates have been severed by the original owner. The conveyance of the several royalty interests constituted a severance of the mineral estates, Marias River Syndicate v. Big West Oil Co., supra, which are taxable to the owners thereof respectively. Fulton Oil Co. v. Toole County, 86 Mont. 367,283 P. 769. And see Stepp v. Pike County Board of Sup'rs, 194 Ky. 176,238 S.W. 408. A commingling of these values with other surface values for tax purposes and all assessed to one owner renders the assessment void. Hinz v. Musselshell County, 82 Mont. 502,267 P. 1113.
I think my associates are not justified under the law in limiting real property taxes to fee-simple titles. Section 1996, Revised Code, defines "real estate" in part as follows: "2. All mines, minerals and quarries in and under the land, subject to the provisions of section 2088 of this code, * * * and all rights and privileges appertaining thereto." This plaintiff, as owner of landowner's royalty, has rights and privileges appertaining to mines and minerals within the meaning of the statute.
A case which I think supports my contention and holds contrary to the views of my associates is that of Graciosa Oil Co. v. Santa Barbara County, 155 Cal. 140, 99 P. 483, 485, *Page 449 20 L.R.A., N.S., 211. That case involved a statute defining "real estate" identical with our section 1996, Revised Codes, except that it does not have the clause, "subject to the provisions of section 2088 of this code." In that case plaintiff held an oil lease containing this clause: "in the event that oil is found, the lessee agrees to deliver or pay as rent or royalty to the said lessor * * * the one-tenth part or share of so much of all the crude oil or petroleum, naphtha, or maltha which may be produced and saved by the lessor from said wells and operations on said premises." The plaintiff contended that there could be but one assessment of the lands and that to the lessor and that the lessee was not taxable. The court held otherwise. The court pointed out too that plaintiff "does not own an absolute present title to the oil strata in place." The court in holding that plaintiff's interest was taxable as real estate said:
"The royalty is frequently fixed before the discovery of oil, usually at a time when the existence of oil in profitable quantities is a matter of conjecture, and without regard to the adjustment between the parties of the burden of taxation upon the respective interests. The value represented by the royalty is ordinarily very small, as compared to that of the right of the lessee. After the discovery of oil in such leased ground, the value of the lessor's real interest and right is much less than it would be if he had the whole estate, including all the oil thus discovered. There is no real parallel between such a case and that of a lessor under an ordinary lease for occupation and use. It is well known that such leasehold estates or interests in oil strata, after a discovery of oil, often command large prices in the market, out of all proportion to the value of the interests of the landowner receiving only the royalty and enjoying the use only for other purposes. The right of the lessee under this contract is more than that of the ordinary lessee. It is of a different character and for a different purpose. He has no right at all to the usufruct of the soil. His right extends to the extraction of a certain part of the substance of the land itself, to its permanent separation and *Page 450 removal and its conversion to his own use. The whole object of the contract is to effect, if not technically a sale and conveyance of a substantial and specific part of the land, at least a disposition and transfer thereof to another.
"It can be easily seen that the reasons for the rule applicable to ordinary leases for the use only that the entire estate should be assessed to the lessor are entirely lacking here, and that it would be a more just and reasonable adjustment of the burden of taxation of such oil leases to assess each party separately with the value of his right or estate in the land."
The court in holding that the interest was real estate under subdivision 2 of their statute which is identical with subdivision 2 of our section 1996 except for the clause above quoted, said: "The oil strata also constitute `minerals in and under the land,' and the rights and privileges of plaintiff under the lease are clearly `rights and privileges appertaining' to such minerals, and consequently are real estate within the meaning of the second subdivision aforesaid." That case was cited with approval by us in the case of Williard v. Federal Surety Co., supra.
I do not think that the clause "subject to the provisions of section 2088 of the code," detracts from the taxability of rights and privileges appertaining to mines and minerals. All that is meant by that clause is that section 2088 must be read in pari materia with section 1996 so that the taxation under section 1996 shall not conflict with any of the provisions of section 2088, the latter being a reiteration of section 3, Article XII of the Constitution. I do not find anything in section 2088 which prohibits the severability of interests in mines and minerals for tax purposes. Certainly if the owner of the land when he leases it as in the Graciosa case without passing title to the lessee of the oil in place, grants a right or privilege in a mine or minerals, then he also does so when he conveys a royalty interest as here even though he does not pass title in fee to the oil in place.
That there is a wide difference between the rights of the *Page 451 holder of a landowner's royalty and the tenant under an ordinary lease is well illustrated by the above-cited cases. Moreover, it seems to me folly to talk of a fee-simple title to oil in place under the ground, although I realize that some courts have used language which would imply that such a thing is possible. The fugacious character of oil necessarily makes such a title merely a paper right with no method of enforcement except by bringing the oil to the surface. In other words, if the oil before capture escapes to the land of another the supposed fee-simple title has necessarily vanished.
I think it is impossible to have an effective fee-simple title to oil under the ground before it has been taken into actual physical possession. Whatever may be the wording of the grant, an oil royalty on certain lands is but the right or privilege of receiving a portion of the oil therefrom or of its value when brought to the surface. And I think that right is an interest in real estate, which can be divested by tax sale proceedings only by separately taxing it to the owner of the royalty interest and not to some one else. Taxation of different interests in the same property to different persons is not a new thing in taxation. 61 C.J. 141. I think the court was right in the case of Sheffield v. Hogg, 124 Tex. 290, 77 S.W.2d 1021, 1024; Id., 124 Tex. 290,80 S.W.2d 741, when it said:
"Endeavoring to reach the true purpose and intent of parties, we can draw no substantial difference, so far as taxation is concerned, between an agreement excepting from a grant or a lease a certain fractional portion of minerals, or an agreement reserving the same portion, or an agreement that the lessor `shall have' or rather shall continue to have the same portion, or an agreement that the lessees shall yield or shall deliver to the lessor exactly the same portion. In either instance, the title to the specified mineral portion is intended to remain or vest, and does actually remain or vest in the lessor. It logically can make no difference, as may have been intimated in this justice's and in other far greater jurists' *Page 452 reasoning, whether the oil is retained by the lessor as oil and gas, readily convertible into cash on the market, or whether the lessee is given a power to sell all of the oil and gas, always accounting for a fixed royalty portion to the lessor. Sound principle, supported by the highest authority, goes further and compels us to accede to the proposition that dealing with oil and gas or dealing with solids in place, like sulphur, lignite, salt, coal, or lime, the lessor owning the entire fee-simple title to the land, and his assigns, who have been careful to secure to themselves, their heirs or assigns (by exception or reservation or by contract for `having' or yielding or paying, or for delivery, or by what-not similar contractual clause), the right to a portion of the proceeds or profits derived from the lessee's or his assigns' authorized sale of the minerals, throughout the duration of a determinable fee, which may be perpetual, have and own a fee-simple interest in the land, or at least have a right belonging or appertaining to the horizontal strata of the land in which the minerals are embedded. Humphreys-Mexia Co. v. Gammon,113 Tex. 247, 254 S.W. 296, 29 A.L.R. 607; Freeport Sulphur Co. v. American Sulphur Royalty Co., 117 Tex. 439, 6 S.W.2d 1039, 60 A.L.R. 890. We therefore hold that all the property interests of ascertainable value, secured to the lessors or their assigns under the Hogg-Hamman lease, are subject to taxation as real estate in the county wherein the land lies, as adjudged by the district court."
The court stressed the importance of its conclusion by saying: "The oil industry of Texas is largely dependent for development, growth, or prosperity, on the doctrine that the interests we are considering — such as the lessee's and the lessor's estates under contracts which are in customary use in Texas — are interests in land; and hence not subject to parol sale, but have the protection of the statute of frauds, the statutes regulating conveyances and mortgages of real estate, and the statutes requiring the record of instruments affecting title to or liens on land, so that purchasers can rely on deed and lien records and can execute and receive transfers and *Page 453 conveyances in reliance on true abstracts of title and lawyers' correct opinions thereon. Were the stability furnished by these rules withdrawn and the fundamental contracts, on which the oil business so largely rests, be adjudged by the Supreme Court to create mere rights in personalty at some uncertain date in the future, the structure of the business would be seriously, if not fatally, jeopardized."
That statement applies with equal force to the industry in Montana. For other cases reaching the same conclusion, see the note in 128 A.L.R. 851, and the main case commencing on page 843.
I think the district court was right in entering judgment for plaintiff and that the judgment should be affirmed.
Rehearing denied June 20, 1945.