No. 93-311
IN THE SUPREME COURT OF THE STATE OF MONTANA
DAVID WINCHELL,
Petitioner and Respondent,
MONTANA DEPARTMENT OF STATE LANDS
and BOARD OF LAND COMMISSIONERS,
Respondents and Appellants.
APPEAL FROM: District court of the Seventh Judicial District,
In and for the County of Dawson,
The Honorable Dale Cox, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Lon J. Maxwell, Special Assistant Attorney General,
Department of State Lands, Helena, Montana
For Respondent:
Lorraine A. Schneider, Simonton, Howe & Schneider,
Glendive, Montana
Justice James C Nelson delivered the Opinion of the Court.
.
Respondents/Appellants appeal from an order of the Seventh
Judicial District Court, Dawson County, denying their Motion to
Alter or Amend Judgment. We affirm in part and reverse in part.
We state the dispositive issues on appeal as follows:
1. Is the petitioner entitled to an evidentiary hearing
after the respondents refused to consider his bid for a state land
lease?
2. Can an unincorporated association lease state land?
The history of the litigation between these parties is set
,
forth in Winchell v. Dep't of State Lands (1988) 235 Mont. 10, 764
P.2d 1267 (Winchell I), and Winchell v. Deprt of State Lands
(1990), 241 Mont. 94, 785 P.2d 212 (winchell 11). The land which
is the subject of these actions is school trust property which the
Department of State Lands and the Board of Land Commissioners
(collectively referred to as DSL) lease to private parties.
In 1988, DSL canceled a state land lease it had with the
petitioner David Winchell (Winchell) and his brother, Thomas
Winchell. The grounds for cancellation were that the Winchells had
grossly mismanaged the real property which was the subject of the
lease. The cancellation of this lease was upheld by this Court in
Winchell 11.
After Winchell I1 was decided, DSL advertised for bids on the
tract of land which had previously been leased to the winchells.
Two advertisements failedto produce responses, so DSL reclassified
the land from grazing land to wildlife habitat. In June, 1991, the
2
land was again advertised for bids. Two bids were received: one
from Winchell for $1,524.50, and one from the Dawson County
Pheasants Forever (DCPF) for $511.35.
DSL refused to consider the bid from Winchell, citing
26.3.142(6), ARM, which states that a person who has had a lease
canceled for any reason other than the nonpayment of rent is not
allowed to bid upon a lease. DCPF was then notified that its bid
was accepted and that, before the new lease could be issued, DCPF
would have t o pay the Winchells for any leasehold improvements, as
required by 55 77-6-301 et seq., MCA. Direct negotiations for
payment of the improvements between the Winchells and DCPF failed,
so the parties resorted to arbitration. In the middle of that
process, Winchell filed a petition for Writ of prohibition and For
Stay of Arbitration Proceedings against DSL.
The District Court granted Winchell8s petition and issued a
writ restraining DSL from issuing the new lease to DCPF. The
~istrictCourt also stayed the arbitration proceedings. DSL moved
to quash the writ, which was denied.
A show cause hearing was held on the petition on August 10,
1992. After that hearing, the District Court issued Findings of
Fact, Conclusions of Law, and an Order in which the court ordered
DSL to r e j e c t the bid of DCPF because it was not a legal entity and
could not hold a leasehold interest in real property. The District
Court also ordered DSL to give Winchell an evidentiary hearing with
respect to the new lease.
In response to this order, DSL filed a Motion to Alter or
Amend Judgment. This motion was denied, and the District Court
ordered DSL to comply with the initial order. From the denial of
that motion, DSL appeals.
Our standard of review relating to conclusions of law is
whether the trial judgers interpretation of the law is correct.
Steer, Inc. v. Deprt of Revenue (l99O), 245 Mont. 470, 474-75, 803
P.2d 601, 603.
I - EVIDENTIARY HEARING/REFUSAL TO CONSIDER BID
DSL contends that the District Court erred in granting
Winchell an evidentiary hearing on the propriety of refusing to
consider his bid for the state land lease. We agree.
The only provision for a hearing after a bid is rejected is in
the case of the renewal of leases. 5 77-6-205, MCA. In that
case, the prior lease holder, who has a preferential right to re-
lease the land, may exercise the preferential right and request a
hearing if he or she believes the high bid is excessive. Section
77-6-205(2), MCA. However, the prior lease belonging to Winchell
was canceled. Thus, this is not a case involving a lease renewal
and the exercise of a preferential right. Therefore, the hearing
provisions of 5 77-6-205(2), MCA, do not apply. Clearly, Winchell
was not entitled to an evidentiary hearing based upon this renewal
statute.
In the case of a new lease, such as the one at issue,
competitive bidding generally governs which bid is accepted.
Section 77-6-202, MCA, provides, in pertinent part:
When the department receives an application to lease an
unleased tract, it shall advertise for bids on the tract.
The tract shall be leased to the highest bidder unless
the board determines that the bid is not in the state's
best interest for the reasons set forth in 77-6-205(2).
If the high bid is rejected, the board shall set forth
the reasons for the rejection in writing. ...
This statute clearly requires that, if the high bid is not
accepted, the board must set forth its reasons for rejecting that
high bid in writing. Again, there is no statutory provision
allowing an evidentiary hearing to be had after a high bid is
rejected.
According to 5 77-6-202, MCA, DSL can only reject a high bid
if doing so is in the State's best interest pursuant to 5 77-6-
205(2), MCA. As we pointed out above, 5 77-6-205, MCA, and the
procedure set forth therein pertain to the renewal of leases as
opposed to leases of unleased tracts. Nonetheless, in 5 77-6-202,
MCA, which does pertain to leases of unleased tracts, the
legislature has specifically chosen to incorporate the "best
interest" and "duty" standards of 5 77-6-205(2), MCA, as the basis
for rejecting the high bid on an unleased tract. Section 77-6-
205(2), MCA, provides, in pertinent part:
[A] bid is not in the best interest of the state [if] it
is above community standards for a lease of the land,
would cause damage to the tract, or would impair its
long-term productivity ... It is the duty of the board
to secure the best lessees possible, so that the state
may receive the maximum return possible with the least
injury occurring to the land.
If DSL rejects a high bid based on the standards enunciated above,
it must, under 5 77-6-202, MCA, set forth the reasons for its
rejection in writing.
In this case, DSL did not make written findings that
Winchell's high bid was not in the best interest of the State
because it either (1) was too high for community standards; (2)
would cause damage to the land; or (3) would impair long-term
productivity. Rather, DSL out-of-hand refused to consider
Winchell's bid at all, based upon 26.3.142(6), ARM, which states:
Any person who has had his lease or license cancelled and
not reinstated by the board or department for any reason
except nonpayment of rentals shall not be allowed to bid
upon the lease or license or upon any lease or license
for land managed by the department. If no other bids are
received, the former lessee or licensee may be allowed to
bid, but the board may reject any or all bids from a
lessee or licensee who has had his lease cancelled in the
past.
DSL contends that this regulation absolutely prohibits Winchell
from bidding on any state land leases, and that it legitimately
refused to consider his bid. With that conclusion, we disagree.
Section 77-6-108, MCA, contains certain proscriptions against
those who may lease state lands. This section provides only that:
No person may lease state lands, except one who is the
head of a family, unless he has attained the age of 18
years. Any such person and any association, company, or
corporation authorized to hold lands under lease may
lease state lands and may hold more than one lease to
state lands.
Importantly, there is no proscription contained in the statute that
one whose lease has been previously canceled may not thereafter bid
on or lease state lands.
Likewise, there is no such proscription in 5 77-6-202, MCA,
which, as discussed above, allows DSL to reject a high bid only on
the basis of a written finding of violation of the standards set
forth in 5 77-6-205(2), MCA. Again, those standards do not contain
any proscription disallowing the bid or ability to lease of one
whose lease has been previously canceled.
Finally, none of the various sections in Title 77, Chapter 6,
MCA, pertaining to the cancellation of leases by DSL contain any
provision that, once a lease has been canceled, the offending
lessee may not, thereafter, bid upon or lease state lands.
Simply put, there is no statutory authority in Title 77,
Chapter 6, MCA, which disallows a lessee whose lease has been
canceled from bidding on a new lease or leasing state lands. The
administrative regulation which purports, in essence, to give DSL
the ability to refuse to even consider a bid, 26.3.142 (6), ARM, is
in derogation of the cited statutes and is, therefore, unlawful to
that extent. See: Bick v. State (1986), 224 Mont. 455, 457, 730
P.2d 418, 420 ["[A] statute cannot be changed by administrative
regulation."1
We recognize the importance and great value of school trust
lands to the State. See Dep't of State Lands v. Pettibone (1985),
216 Mont. 361, 702 P.2d 948. Unquestionably, in discharging their
fiduciary duty to manage state trust lands according to the highest
standards, the Board of Land Commissioners and DSL, under the
direction of that Board, exercise considerable discretionary
powers. See 5 5 77-1-202 and 77-1-301, MCA; State ex rel. Gravely
v. Stewart (1913), 48 Mont. 347, 137 P. 854; State ex rel. Thompson
v. Babcock (1966), 147 Mont. 46, 409 P.2d 808; Jeppeson v Dep't of
.
State Lands (1983), 205 Mont. 282, 667 P.2d 428.
Nonetheless, the broad discretionary powers of DSL are not
without limit and are defined by the parameters of statutory
requirements enacted by the legislature. See Winchell I, 764 P.2d
at 1270. We hold that, because DSL refused to consider Winchellls
bid pursuant to an overbroad and unlawful administrative
regulation, DSL acted in excess of its jurisdiction and abused its
discretion. We reiterate that, according to statutory authority,
a high bid can only be rejected if DSL makes written findings that
the high bid was too high for community standards, would cause
damage to the land, or would impair long-term productivity.
We note that DSL may, in exercising its discretion, consider
the fact that Winchell's lease was previously canceled, and the
circumstances of that cancellation, as evidence supporting any of
the three statutory bases for rejecting his high bid. However, the
fact of the previous cancellation cannot, in and of itself,
automatically prohibit the applicant from either bidding or
leasing. DSL must consider Winchellrs bid in the context of the
statutory requirements of 5 5 77-6-202 and 77-6-205(2), MCA.
I1 - LEASING TO UNINCORPORATED ASSOCIATION
DSL also contends that it properly granted the lease to DCPF,
which is an unincorporated association. We disagree.
As discussed above, 5 77-6-108, MCA, addresses who may lease
state lands:
No person may lease state lands, except one who is the
head of a family, unless he has attained the age of 18
years. Any such person and any association, company, or
corporation authorized to hold lands under lease may
lease state lands. ...
(emphasis added)
Section 26.3.129(19), ARM, defines lgpersonlf purposes of state
for
leases as "any individual, firm, association, corporation,
governmental agency, or other legal entity." At issue in this case
is whether DCPF is an association authorized to I1hold lands under
lease.It DCPF is an unincorporated association and its bid was
signed by its president, Mark Zuber.
Winchell contendsthat unincorporated associations and similar
entities not on record with the Secretary of State are prohibited
from acquiring state land leases. DSL argues that § 77-6-108, MCA,
allows organizations not on file with the Secretary of State,
including tlloosely-knitgroups such as associations, companies,
partnerships, and similar organizations" to obtain leases. The
District Court found that DCPF was not a legal entity and that,
under common law principles, it could not hold a leasehold interest
in real property.
This is an issue of first impression in Montana. We have not
found nor have we been cited to any Montana authority on the issue
of whether or not an unincorporated association can hold lands
under lease.
We have previously stated that a lease is a conveyance of an
interest in land. See Knight v. OM1 Corp. (1977), 174 Mont. 72,
568 P.2d 552. At common law, an unincorporated association is not
considered a legal entity capable of acquiring or holding title to
real property in the association's name. North Little Rock Hunting
Club v. Toon (Ark. 1976), 536 S .W.2d 709, 713-14; Bank of Oak Grove
v. Wilmot State Bank (Ark. 1983), 648 S.W.2d 802, 803: O.K.C. Corp.
v. Allen (Tx. 1978), 574 S.W.2d 809, 812. The reasoning behind
this common-law rule is sound: there must be some legal,
identifiable party holding the interest who is responsible for
liability arising out of that ownership interest,
In Toon, the North Little Rock Hunting Club, an unincorporated
association, leased real property in its own name. The lessor sold
the property to the Toons, who filed an action attempting to void
the lease agreement with the hunting club. Toon, 536 S.W.2d at
711. The lower court held that, at common law, an unincorporated
association could not hold title to real property, and the Arkansas
Supreme Court affirmed the holding. Toon, 536 S.W.2d at 713-14.
In O.K.C., trustees of the White Rock Chapel Church filed an
action to establish title to a tract of land. O.K.C., 574 S.W.2d
at 811. The Court of Civil Appeals of Texas stated that an
unincorporated association cannot acquire title to real property in
its own name. The court went on to state, however, that trustees
of an unincorporated association can hold real property interests.
O.K.C., 574 S.W.2d at 812.
Both of these cases illustrate the important policy reasons
supporting the common law rule. In 0.K. C. , individual,
identifiable trustees were able to hold real property interests.
However, in both 0.K. C. and Toon, the associations themselves could
not hold real property interests. We agree with the reasoning
behind these cases, and adopt the same in this case.
DSL argues that it can hold the person signing the lease
liable for a breach of the lease agreement or for damages caused to
the land. However, if that person has moved, died or cannot be
located, DSL is left with a lease where the actual, nominal lessee
is an organization with no legal status, whose membership is
probably unknown, and which may be operating without the benefit of
any formal organization or regularly elected or appointed
representatives with clearly delineated authority to bind the
membership of the organization. If the lessee & the individual,
then DSL has clearly defined legal remedies for enforcement and
breach of the lease against that individual. If, on the other
hand, the actual, nominal lessee is nothing more than a "loosely-
knit group" purportedly represented by an individual who may or may
not have authority to bind the individual members of that group.
then DSL8s ability to enforce its lease is, at best, questionable.
Entering into leases whose enforceability is questionable flies
directly in the face of DSL's fiduciary duty to "secure the best
lessees possible, so that the state may receive the maximum return
possible with the least injury occurring to the land." Section 77-
6-205(2) , MCA.
Montana has statutorily recognized two types of associations
as legal entities. These associations include cooperative
associations and agricultural associations, as provided for in
Title 35, Chapters 15 and 16, MCA. Both of these entities have the
statutory authorization to hold real property interests. Section
35-15-103, MCA; Section 35-16-202, MCA. There is no provision in
the Montana statutes that allows unincorporated associations,
without a legal identity, to hold real property interests.
Therefore, we hold that DCPF, an unincorporated association and,
thus, a non-legal entity, cannot lease state lands in its own name.
DSLrs own regulation supports this conclusion: 26.3.129(19), ARM,
allows DSL to lease to 1gpersonst8,
which is defined to include
various types of organizations "and other leaal entities." This
definition necessarily implies all the organizations listed in the
definition, including individuals, finns, associations,
corporations, and governmental agencies, must have a legal
existence in one form or another. The District Court correctly
interpreted the law on this issue.
Finally, DSL contends that, even if DCPF cannot hold a state
land lease, Pheasants Forever, Inc., can hold such a lease. DCPF
is a local chapter of and is sponsored by Pheasants Forever, Inc.,
which is registered and authorized to do business in Montana as a
corporation. We note, however, that Pheasants Forever, Inc. was
not the bidder on the state lease; DCPF was. Therefore, whether
Pheasants Forever, Inc. can hold the lease is irrelevant.
Affirmed in part and reversed in part
2
Justices
Justice Terry N. Trieweiler dissenting.
I dissent from the majority's holding under both Issue I and
Issue 11.
I agree that Winchell was not entitled to an evidentiary
hearing and that the District Court erred by requiring one.
However, I strongly disagree with the majority's conclusion
that 26.3.142(6), ARM, is in derogation of State statutes, and
therefore, unlawful.
Section 77-6-205(2), MCA, provides that "[ilt is the duty of
the board to secure the best lessees possible, so that the state
may receive the maximum return possible with the least injury
occurring to the land." The same statute also provides that a "bid
is not in the best interest of the state ... [if it] would cause
damage to the tract . . . . " It is not inconsistent with that
statute for the Department of State Lands to conclude that prior
conduct which was sufficiently detrimental to the land to cause
cancellation of the lessor's lease should disqualify the same
lessor from bidding on the same lease in the future. Therefore, I
conclude that 26.3.142 ( 6 ) , ARM, is a reasonable regulation adopted
in furtherance of the criteria set forth in 77-6-205(2), MCA.
I concur with that part of Justice Hunt's dissenting opinion
in which he dissents from the majority's decision under Issue 11.
However, I also dissent for the reason that the majority 's decision
is contrary to the plain language of 5 77-6-108, MCA, which clearly
provides that "any association . . . authorized to hold lands under
lease may lease state lands . . . .I1 There is no statutory rule
which would prohibit this association from holding lands. Neither
is there any prior case law in Montana which would prohibit it from
doing so. All of the public policy reasons set forth by the
majority for prohibiting unincorporated associations from holding
title to real property would apply equally to incorporated
associations. The only difference between the two types of entity
is a piece of paper filed with the Secretary of State. Therefore,
I conclude that the distinction between incorporated and
unincorporated associations makes no practical difference.
For these reasons, I join in Justice Hunt's dissent from
Issue 11, and also dissent from the majority's decision under
Issue I. I would reverse the judgment of the District Court and
uphold the lease between the Department of State Lands and Dawson
County Pheasants Forever.
Justice William E. Hunt, Sr., dissenting.
I concur with Justice Trieweiler's dissent on Issue I. I also
dissent on Issue 11. When Mark W. Zuber signed the lease with the
State of Montana for "Dawson County Pheasants Forever" as
president, he became individually liable on the lease to the State
of Montana if he represented an entity that for any reason could
not hold an interest in real estate. He could not escape that
liability any more than he could escape the liability if he had not
signed as president of the organization but signed as an
individual. I see nothing in the statutes or the common law that
would change that result. He furnished the necessary documents
with his bid that included his address and telephone number, and
there is nothing in the record to show that it would be any more
difficult to trace him to answer for any breach of the lease to the
State. I would reverse on this ground alone.
But I would like to add, in addition, that Mr. Zuber was not
served in the proceedings, according to the record, despite the
fact that his address and telephone number were immediately
available. Apparently no attempt was made to find out from him, or
any other official of the organization he represented, the
necessary proof of the right to hold property. Counsel for the
unsuccessful bidder wrote a letter to the Montana Secretary of
State asking for information about the status of the Dawson County
organization and was advised that there was no record of that
entity on file, and of course, there is not. But the record does
disclose that upon the Department of State Landst appeal for
15
reconsideration of the findings of fact, conclusions of law, and
judgment of the District court, a document was produced, duly filed
with the Secretary of State, of a Minnesota corporation of
Pheasants Forever, Inc., and accompanying that document was an
affidavit by the secretary/ treasurer of the Dawson County
Pheasants Forever stating that such an organization did exist and
was a duly authorized chapter of the registered "Pheasants Forever,
Inc." The District Court denied the motion to reconsider.
The local chapter was not incorporated, and therefore, its
title would not appear in the Secretary of State's office. With a
shortage of personnel and 10,000 leases through the State of
Montana, the Department of State Lands is not in the position to
determine the legal status of each of its lessees to determine if
they can hold an interest in property. Until the majority opinion,
it did not have to.
I would reverse on the grounds that the individual who signed
the lease was a proper individual to hold a leasehold interest. At
the very least, I would remand for a hearing to consider all of the
evidence presently in the file in order to determine if the Dawson
County Pheasants Forever organization is capable of holding a
lease.
Justice