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Western Oil & Refining Co. v. Venago Oil Corp.

District Court of Appeals of California, Third District
Nov 22, 1932
16 P.2d 190 (Cal. Ct. App. 1932)

Opinion

Hearing Granted by Supreme Court Jan. 20, 1933.

Appeals from Superior Court, Los Angeles County; Leon R. Yankwich, Judge.

Actions in interpleader by the Western Oil and Refining Company, against the Venago Oil Corporation and others, all of whom filed cross–complaints. Judgment for the Venago Oil Corporation, and the other defendants appeal.

Affirmed.

COUNSEL

Bailie, Turner & Lake, of Los Angeles, John H. Burke, of Long Beach, Wallace Collins, of Los Angeles, and Harry A. Houser and Lewis N. Whealton, both of Long Beach, for appellants.

Arthur G. Baker, Mark F. Jones, G. J. Oppegard, and W. L. Engelhardt, all of Los Angeles, for respondent.


OPINION

Mr. PULLEN, Presiding Justice

Through various undisputed transfers a leasehold interest in certain gas and oil properties was vested in F. M. Miller, a cross-defendant and respondent herein, and upon which properties he undertook to drill an oil well.

In order to obtain funds to carry on the development work and prior to the production of oil and gas, he issued and disposed of for cash certain per cents. or interests in specified units of oil and gas which might be produced, saved, and sold under the terms of his lease. These interests were evidenced by written instruments and disposed of to various parties through brokers. The holders of such units are referred to herein as Campbell and associates.

Prior to February 1, 1929, Miller, being in need of certain drill pipe with which to complete the drilling of said well, entered into an agreement with the Standard Pipe & Supply Company (hereafter referred to as Standard), whereby Standard, in consideration of 2 per cent. of the proceeds from the production of said well, less a certain cash deduction, agreed to furnish a specified amount of pipe, and in a second agreement between Miller and Standard, the pipe company leased to Miller 6000 feet of pipe for a period of 55 days from February 1, 1929, at an agreed rental of $2,500 and a further charge of $40 per day for each day the pipe was retained after the expiration of the specified period. As security for said $2,500 and any charge for overtime the pipe might be retained and as security for all other obligations then due Standard, Miller granted and assigned unto standard an additional 10 per cent. of all oil, etc., which might be produced and saved from the real property in question.

About March 13, 1929, Miller, together with two others, formed the Venago Oil Corporation for the purpose, among others, of taking over and completing the well. These three incorporators became the directors and officers of the corporation and filed a petition with the commissioner of corporations requesting that certain qualifying shares be issued to them as incorporators and that they be permitted to sell certain other per cents. at a specified amount.

On the same day, Miller executed a purported assignment to C. Sand, reciting that on January 21, 1929, he (Miller) had assigned and transferred the lease in question to C. Sand, as security for the repayment of certain money, and that C. Sand had become the purchaser of said lease and that Miller desired to transfer to C. Sand all his right, title and interest in said lease or sublease.

Immediately thereafter C. Sand conveyed to Venago Oil Corporation 67 1/2 per cent. of all right, title, and interest in and to all oil, etc., produced from said premises, the balance thereof having been reserved by prior lessors; also, at the same time, C. Sand conveyed to the Du Cal Company all right, title, and interest in and to the sublease, subject to the assignment to Venago Oil Corporation of 67 1/2 per cent. of all oil, etc., produced from the premises, and a few days later, Miller assigned to Du Cal Company all his right, title, and interest in and to said sublease. Thereafter, and on August 10, 1929, the Du Cal Company, Inc., assigned its interest in the lease to Venago Oil Corporation, and contemporaneously therewith C. Sand also conveyed all her interest in the lease to Venago Oil Corporation, thereby vesting in said Venago Oil Corporation the title to both the rights to the oil and the leasehold interest.

On March 29, 1929, the original incorporators assigned their subscriptions of one share each of stock in the Venago Oil Corporation to Mark F. Jones, G. J. Oppegard, and M. A. Egan whereupon these stockholders were elected officers and directors of Venago Oil Corporation and have ever since remained as such.

As soon as Jones and his associates acquired the assignment of the lease and the stock subscription, the commissioner of corporations was notified of that fact and also notified of the fact that the corporation had rescinded a resolution previously adopted pursuant to which the corporation had asked for permission to issue securities in place of those theretofore issued by Miller, and the various unit holders were also notified that the corporation would not recognize the units previously issued by Miller to them.

Thereafter, and on August 15, 1929, the well was completed and brought into production and upon demand of Standard and the unit holders the Western Oil & Refining Company, which was the purchaser of the crude oil production of the Venago Oil Corporation from the property here in question, withheld the funds claimed by the holders of interests and commenced this action in interpleader.

The trial court held that Venago Oil Corporation was entitled to all the funds for two reasons: First, that units or per cents. so issued did not convey any rights to the oil in place, were personal property, and merely the personal undertakings of Miller, and that when the lease was assigned to the Venago Oil Corporation, the assignee took the land free of any lien by reason thereof; and, secondly, that the units were securities issued contrary to the provisions of the Corporate Securities Act (St. 1917, p. 673, as amended) and were therefore void.

The holding of the trial court was, in effect, that all production belonged to Venago Oil Corporation, which had completed the well and produced and captured the oil and gas, and that prior to such production and capture, the oil and gas were incapable of being sold, transferred or encumbered by the percentage instruments issued by Miller to Standard or Campbell and associates, and the Venago Oil Corporation, having acquired the sublease and having produced and captured the oil and gas, was not bound in law or equity to pay to Standard or the unit holders any part thereof, nor the proceeds therefrom.

The first point to determine is the nature and extent of the estate and interest conveyed and transferred by Miller to Standard and Campbell and his associates and the effect thereof as between Western, Venago, and these claimants.

Appellants devote considerable time to the establishment of the proposition that Miller was vested with a leasehold interest and that an instrument creating such relationship was entitled to be recorded and to the protection given by the statute covering recordation. Counsel for Venago Oil Corporation concede such to be the law in an ordinary lease, but claim that as to an oil and gas lease a different rule applies. So, therefore, it is necessary to determine the nature of such a lease and what principles are applicable to oil and gas in place and prior to capture; in other words, has oil in place a potential existence before it has been captured, and does it form a proper subject of immediate sale?

In Brookshire Oil Co. v. Casmalia, etc., Co., 156 Cal. 211, at page 215, 103 P. 927, 928, the Supreme Court considering an oil case said:

"This instrument does not vest in the so-called lessees any present title in the land. It grants only the right to do certain things thereon and to take certain mineral substances therefrom, and no title to such substances passes from the original owner until the same is severed from the realty. In regard to such agreements it is said: ‘The title is inchoate and for purposes of exploration only, until oil is found. If it is not found, no estate vests in the lessee, and his title, whatever it is, ends when the unsuccessful search is abandoned. If oil is found, then the right to produce becomes a vested right, and the lessee will be protected in exercising it in accordance with the terms and conditions of his contract.’ Venture Oil Co. v. Fretts, 152 Pa. 451, 460, 25 A. 732; Steelsmith v. Gartlan, 45 W.Va. 27, 34, 29 S.E. 978, 44 L. R. A. 107; Lowther Oil Co. v. Miller, etc., Co., 53 W.Va. 501, 97 Am. St. Rep. 1027, 44 S.E. 433; Huggins v. Daley, 99 F. 608, 48 L. R. A. 320, 40 C. C. A. 12; Gadbury v. Ohio, etc., Gas Co., 162 Ind. 14, 67 N.E. 261, 62 L. R. A. 895; Eaton v. Allegany Gas Co., 122 N.Y. 417, 25 N.E. 981; Funk v. Haldeman, 53 Pa. 229, 242; Union, etc., Co. v. Bliven, etc., Co., 72 Pa. 173; Grubb v. Grubb, 74 Pa. 25, 33; Thornton on Oil, § 53.

"With regard to possession of the land, the agreement gives it for special purposes only, and so far as may be necessary and convenient for such purposes and no farther. The right of possession is limited to the possession necessary to enable the lessees to search for the minerals they are allowed to take, until such minerals are found, and thereafter to the possession of only the part required for the convenient operation of the works they may construct and use for the extraction and removal of the minerals."

The same rule is substantially laid down in the case of Craciosa Oil Co. v. Santa Barbara County, 155 Cal. 140, 99 P. 483, 486, 20 L. R. A. (N. S.) 211, as follows: "There are material differences between such estates for years and the right and privilege to bore for and extract oil held by the [lessee] under its oil lease. See Thornton on Oil, § § 47, 48. The plaintiff [lessee], it is true, does not own an absolute present title to the oil strata in place. Such an absolute estate in an underlying stratum may be created and the estate of the owner of the overlying land and of the owner of the subterranean stratum will be as distinct and separate as is the ownership of respective owners of two adjoining tracts of land. For purposes of separate ownership, land may be divided horizontally as well as superficially and vertically. Jones on Real Prop. § 537; State v. Moore, 12 Cal. 56, 70. But the contract in question vests no present title in a stratum in place. It leaves the title to the oil in the landowner until it is brought to the surface. The right vested in plaintiff is an estate for years, so far as necessary for the purpose of taking oil therefrom, and it carries with it the right to extract the oil and remove it from the premises. This right constitutes, for the term prescribed, a servitude on the land and a chattel real at common law. Civ. Code, § 801, subd. 5; section 802, subd. 6; Harvey C. & C. Co. v. Dillon, 59 W.Va. 605, 53 S.E. 928-937 [62 L. R. A. (N. S.) 628], and cases there cited; Thornton on Oil Leases, § 51."

Standard cites in support of its contention the case of Chandler v. Hart, 161 Cal. 405, 414, 119 P. 516, Ann. Cas. 1913B, 1094, where the court had under consideration an oil lease, similar in general terms, to the one here before the court, but with this material difference, that in the cited case, the consideration had been paid in full and there was nothing further to be done or performed by the lessee, which is quite different from the case at bar, which contains a provision for the payment of royalties based upon production.

Neither is the case of Chandler v. Bowman, 100 Cal. 221, 279 P. 1041, cited by appellant, considered in point, for in that case the conveyance was in the form of a deed, and there, also, the consideration had been paid in full.

The case of Black v. Solano Co., 114 Cal. 170, 299 P. 843, 845, discusses at considerable length some of the points here raised. It is there said:

"Under the ordinary lease, the title to the oil at the time the plaintiff and the defendant each acquired the respective rights here involved was in the owner of the land, not in the lessees.

"They, it is true, had an estate for years in the land, with the right to go upon it and prospect for and extract the oil. Until found and severed from the realty, it was not theirs, and did not become theirs until brought to the surface, when it became personal property. Graciosa Oil Co. v. Santa Barbara County (1909) 155 Cal. 140, 99 P. 483, 20 L. R. A. (N. S.) 211; Brookshire Oil Co. v. Casmalia, etc., Co. (1909) 156 Cal. 211, 103 P. 927; Taylor v. Hamilton (1924) 194 Cal. 768, 774, 230 P. 656. The oil was, however, potential personal property and so the subject of a sale (as distinguished from an executory contract to sell). ‘In such case, the sale is absolute and perfect when made, vesting the property in the purchaser the moment it comes into existence.’ Merrill v. California Petroleum Corporation (1930) 105 Cal.App. 737, 288 P. 721, 723. See, also, Hamilton v. Klinke (1919) 42 Cal.App. 426, 183 P. 675; Sun-Maid Raisin Growers v. Jones (1929) 96 Cal.App. 650, 274 P. 557.

"In view of these principles, it is necessary to conclude that there was nothing more than a present sale of potential personal property accomplished by the transfer on which plaintiff relies. That which is the subject of the deal is ‘five per cent. (5%) of any and all oil * * * produced, sold and saved.’ There is here no hint of any attempt to pass title to the oil while it was a part of the realty; that is, before it was ‘produced, sold and saved.’ Nor is there a suggestion of a transfer to plaintiff of any right to go upon the land for any purpose. There was not created here any estate or interest in real property, nor was the title or possession of real property affected. There is a line of reasoning employed in the recent case of Richfield Oil Co. v. Hercules Gasoline Co. (1931) 112 Cal.App. 431, 297 P. 73, 76, which further supports this conclusion. The agreement there under review was an executory contract for the sale and purchase of oil between the plaintiff and the owner of the land. The question presented was, Did the contract create an interest in real property? Plaintiff contended that it had an interest in the land because the agreement established a ‘profit a prendre.’ In disagreeing with this position, the court said: ‘This contract confers no right upon the plaintiff to enter the premises and develop oil or to sever the oil from the realty. It is a plain executory contract for the sale of personal property of and when that property should come into the possession of the vendor. The exclusive right to develop and produce the oil is left with the vendor. He retains exclusive possession and title of and to the realty, and hence of the oil in the ground, until the oil is severed and delivered to the tanks maintained by him on his own premises.’ See, also, Bartholomae Oil Corp. v. Delaney (1931) 112 Cal.App. 314, 296 P. 690.

"We conclude, therefore, that the recordation of plaintiff’s agreement did not give defendants constructive notice of its existence or terms."

See, also, People v. Associated Oil Co., 211 Cal. 93, 294 P. 717, and Bandini Petroleum Company v. Superior Court, 110 Cal.App. 123, 293 P. 899.

Other cases might be cited, but the rule appears to be that, under the ordinary oil and gas lease, the right of entry upon land for the purpose of exploring for oil vests in the lessee upon the execution of the lease, but the title to the oil and gas is inchoate, and does not vest until the oil and gas are reduced to possession. In other words, the oil and gas lease is to be distinguished from the ordinary lease in that the lessee, under such oil lease, does not acquire a vested interest in the oil and gas in place prior to its development, but only a right to enter and develop the well and remove the oil when so developed.

Standard also contends that Venago Oil Corporation took with constructive notice of the Miller assignments. But, even conceding that to be the case, an examination of the transfers from Miller to Standard reveals the fact that Miller did not assign any interest in the leasehold, or to any rights to oil and gas in place, but only to a share of the oil and gas "produced and saved."

The essential portions of the agreement between Miller and Standard are as follows:

"That I, F. M. Miller, a single man, for value received, have granted, bargained, sold, assigned and transferred and do hereby grant, bargain, sell, assign and transfer unto Standard Pipe and Supply Company, a corporation, two per cent. (2%) of all gas and oil or other hydrocarbon substances hereafter produced and saved from (describing premises) * * * after the well or wells on said property has or have been completed and put on production subject to an existing contract for the sale of such production to the Western Oil and Refining Company.

"[Signed] F. M. Miller."

An analysis of the foregoing reveals that the agreement was an assignment of the cash to be received from 2 per cent. of any oil or gas that might thereafter be produced and saved from the property described, and all that was done or attempted to be done was to assign a share in the proceeds, which might be received from the sale from the production of the well, but Miller, being unable to recover any oil or gas, abandoned the project, and no rights have accrued under the assignment.

Miller, in a second agreement, also attempted to mortgage 10 per cent. of the proceeds for the purpose of securing to Standard the payment of $2,500 for certain equipment leased to Miller, but the commodity attempted to be mortgaged not being in esse and being upon a fund to be acquired in the future is not subject to mortgage and created no lien upon the fund. Section 2955, Civ. Code.

Furthermore, the rule seems to be that a valid chattel mortgage cannot be created as to minerals yet unproduced.

"It has been held that growing trees, fruit, grass and shrubs, although unlike crops and other yearly products of the soil in that they are a part of the realty until severed therefrom, may nevertheless be conveyed by a chattel mortgage, the mortgage working a severance; but this rule has not been applied to such articles as are parts of the soil itself, such as clay for the making of bricks and ores that have not been mined." 11 Cor. Jur. § 55, p. 445.

In the case of Townsend Brick & Contracting Co. v. Allen, 62 Kan. 311, 62 P. 1008, 52 L. R. A. 323, 84 Am. St. Rep. 388, the Supreme Court of Kansas had before it a question of the validity of a chattel mortgage which was given by a lessee to his lessor covering clay and material taken from the premises and the brick manufactured to secure the payment of rental. The court held, among other things, that the attempt to give a chattel mortgage upon the clay in the bank was ineffectual, "because there was no severance, no setting apart by markings or otherwise, and, being in its natural state, it must be regarded as realty."

In our study of the present controversy the case of Merrill v. Cal. Pet. Corp’n, 105 Cal.App. 737, 288 P. 721, has been brought to our attention. In that case, Lake was the owner of an oil lease on a royalty basis and entered into an agreement to sell to defendant, at the market price, all of the oil produced and saved under the lease. Thereafter, Lake sold and assigned to Merrill 12 1/2 per cent. of all oil produced, saved, and marketed from said premises under his lease; it being stipulated that Lake had sold all of the oil that might be produced to California Petroleum Company. California Petroleum Company refused to recognize the assignment to Merrill and he brought this action. The court there held that the effect of the instrument was to assign an interest in personal property, and as such the title passed, but whether or not there was a conveyance of any interest in the land or the leasehold was not involved. No issue arose in that case between the holders of a royalty interest or the rights of a lessor or lessee under an oil lease, nor of a sale of oil in place, such as we have for consideration in the case before us. We have also examined the case of Jones v. Pier (Cal.App.) 12 P.2d 646, which we find to be an action by plaintiff to quiet title to 1 per cent. of all oil extracted from certain real property. It appears that prior to the assignment to plaintiff, his assignor was the owner of a tract of land and the assignor, with others, joined in a community lease conveying their property for oil exploitation. Thereafter, one of the parties to the community brought an action to quiet title against the lessees of the community interest, but this court held that community lease could not be terminated by one joint lessor without the joining or concurrent act of all the joint lessors, and, inasmuch as the lease was in full force and effect, plaintiff was entitled to have his title to 1 per cent. quieted as against his lessor.

The foregoing case does not discuss the title to oil and gas in place nor the rights of the holders of royalty interests as against adverse claimants, and is, therefore, not in point in the present case.

It is also contended by Venago Oil Corporation that the various transactions between Miller and Standard and also the percentage holders, appearing here as defendants, cross-complainants and appellants, come within the provisions of the Corporate Securities Act, as amended in 1925 (St. 1925, p. 962) and the issuance thereof not having been authorized by the commissioner of corporations are, therefore, void. If, however, the conclusion of this court is correct that the assignments from Miller to Standard and Campbell conveyed no interest to the oil in place, but were merely the personal undertakings of Miller to become and be effective only when the oil was captured by him, we need not pass upon the validity or invalidity of the transaction, as affected by the Corporate Securities Act.

However, an examination of the testimony shows that the per cents. here issued to Campbell and associates were offered to the general public. In answer to a question asked by counsel for the Venago Oil Corporation, one of the brokers called by Campbell as a witness testified he bought the per cents. to retail to the public and sold them to whomever possible. It is also beyond question that the well was "undeveloped" at the time of the transfer, and prior to the time oil was actually produced by the Venago Oil Corporation.

It is next urged by Standard that the agreement between Miller and Standard were valid in equity irrespective of what may be the legal effect thereof. That rule is based upon the equitable principle that if Miller had developed the oil, he was bound in good conscience to execute such instruments as would carry out the principal agreement of the parties, but Miller did not produce the oil and the trial court found upon competent evidence that there was no fraud or collusion between Miller and his successor, Venago Oil Corporation, and that he had no interest or estate in the corporation or the product of the well. It is true that Miller conveyed and transferred to Venago Oil Corporation his right, title, and interest in this property, but, as before indicated, until the oil had been captured Miller had nothing to convey but a right of entry.

The sufficiency of the findings are attacked, but we fail to find wherein they are deficient, in view of the fact that we are not passing upon the terms of the Corporate Securities Act.

It appears from the record that Joseph McDonnell, Dan Howk and Louis F. Monken intervened in the above-entitled action before the trial thereof, and issues were joined in said action upon said intervention, and judgment was rendered adversely to the said interveners; that in due time these interveners filed their notice of appeal, wherein they appealed from said judgment to the Supreme Court of this state, but no further steps or action of any kind were taken by said interveners to perfect said appeal, and the time having long since expired for the taking of any steps to perfect said appeal, the said appeal of the interveners is hereby dismissed.

The judgment is affirmed.

We concur: R. L. THOMPSON, J.; PLUMMER, J.


Summaries of

Western Oil & Refining Co. v. Venago Oil Corp.

District Court of Appeals of California, Third District
Nov 22, 1932
16 P.2d 190 (Cal. Ct. App. 1932)
Case details for

Western Oil & Refining Co. v. Venago Oil Corp.

Case Details

Full title:WESTERN OIL&REFINING CO. v. VENAGO OIL CORPORATION ET AL.[*] (TWO CASES).

Court:District Court of Appeals of California, Third District

Date published: Nov 22, 1932

Citations

16 P.2d 190 (Cal. Ct. App. 1932)