Ruthven & Co. v. Pan American Petroleum Corp.
39 Oil & Gas Rep. 242, 482 P.2d 28, 206 Kan. 639 (1971)
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Rule of Law:
An entirety clause in an oil and gas lease, providing for royalty apportionment if “the leased premises are now or hereafter owned in severalty or in separate tracts,” applies only to the lessor's interest actually subjected to the lease, not to unleased mineral interests within the described tract held by non-parties.
Facts:
- On July 3, 1924, C. A. Mermis and Paulina Mermis conveyed an undivided one-fourth interest in oil and gas minerals from the west half of a quarter section of land to George W. Holland, with the instrument recorded on March 10, 1925.
- On June 13, 1936, Paulina Mermis, then a widow and owner of the west half, executed and delivered a "Ratification of Mineral Deed" to George W. Holland, which was recorded on June 15, 1936, and was intended to ratify and confirm the 1924 document.
- Plaintiffs are the successors in interest to George W. Holland, who died on December 22, 1946.
- On June 18, 1956, Paulina Mermis executed and delivered an oil and gas lease (the "Dreiling lease") covering the entire quarter section to Leo J. Dreiling, and this lease included an entirety clause; plaintiffs never joined in this lease.
- Beginning August 16, 1956, oil production under the Dreiling lease was obtained from wells located only on the east half of the quarter section, with no production ever obtained from the west half.
- Stanolind Oil Purchasing Company (predecessor to defendant Pan American Petroleum Corporation) purchased the oil and, starting November 12, 1956, paid all landowner's one-eighth royalty for the east half production to Mrs. Mermis, and thereafter to her estate and successors until royalty payments were impounded in September 1967.
- Plaintiffs never received any royalty payments based on production under the Dreiling lease.
Procedural Posture:
- Plaintiffs commenced an action against Pan American Petroleum Corporation in the trial court (court of first instance) for an accounting of oil proceeds.
- Pan American answered, asserting defenses of laches and estoppel, and brought in Curtis Warren, the Witt heirs, and the executors of the Paulina Mermis estate as third-party defendants, seeking reimbursement if held liable.
- The trial court made two separate rulings: 1) it held that the Mermis-Holland instruments constituted a valid mineral deed effective June 13, 1936, conveying an undivided one-fourth of the minerals in the west half and quieted title in plaintiffs; 2) it ruled that the entirety clause under which plaintiffs claimed was not applicable because Mrs. Mermis could not lease the undivided interest owned by plaintiffs, and thus that interest was not part of the "leased premises."
- Plaintiffs appealed the trial court's second ruling to the Supreme Court of Kansas.
- Defendants (third-party defendants) cross-appealed the trial court's first ruling to the Supreme Court of Kansas.
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Issue:
Does an entirety clause in an oil and gas lease, which states that "If the leased premises are now or hereafter owned in severalty or in separate tracts, the premises, nevertheless, may be developed and operated as an entirety, and the royalties shall be paid to each separate owner in the proportion that the acreage owned by him bears to the entire leased area," apply to apportion royalties to mineral owners who did not join the lease, when the lessor executed the lease covering the entire described tract but only owned a partial mineral interest in a portion of that tract?
Opinions:
Majority - Harman, C.
No, the entirety clause in the Dreiling lease does not apply to apportion royalties to the plaintiffs because the term "leased premises" refers only to the interests Paulina Mermis actually owned and subjected to the lease, not to the plaintiffs' unleased interests. The court first addressed the cross-appeal, affirming the trial court's finding that the 1936 "Ratification of Mineral Deed" constituted a valid conveyance of an undivided one-fourth mineral interest in the west half to Holland. This instrument independently met all requirements for a valid transfer of interest in land, including proper description, words of grant, delivery, acceptance, consideration, and timely recordation, regardless of any alleged defects in the earlier 1924 instrument or tax listing requirements. Regarding the main appeal, the court held that the entirety clause was inapplicable. The operative phrase, "If the leased premises are now or hereafter owned in severalty or in separate tracts," hinges on the definition of "leased premises." Paulina Mermis alone executed the lease. At that time, she owned the east half (80 mineral acres) and an undivided three-fourths of the west half (60 mineral acres). She could not and did not lease the plaintiffs' undivided one-fourth mineral interest in the west half. Therefore, the "leased premises" comprised only the 140 mineral acres that Mrs. Mermis actually owned and subjected to the lease, not the entire quarter section. Since these specific "leased premises" (her 140 acres) were not owned in severalty in a way that would trigger apportionment under the clause, the entirety clause never became operative. The court distinguished Hoffman v. Sohio Petroleum Co., noting that in Hoffman, the lease was executed by the owner of the entire acreage before mineral ownership was divided, which differs from the present case where the mineral interest was divided before the lease containing the entirety clause was executed. The court found support in legal treatises and similar cases for its interpretation that an entirety clause operates only on interests actually encompassed by the lease. Furthermore, the "lesser interest" clause did not contractually bring the apportionment rule into effect, as its purpose is to adjust the lessor's royalty based on their actual ownership, not to extend royalties to non-lessors. Evidence also indicated that the lessee never treated the quarter section as an entirety in operations.
Dissenting - Schroeder, J.
Yes, the plaintiffs are entitled to share in the royalty oil because the clear language of the lease, including the granting, lesser interest, and entirety clauses, demonstrates that the "leased premises" referred to the entire quarter section, and the entirety clause should therefore apportion royalties. Justice Schroeder argued that the "leased premises" clearly referred to the entire quarter section of land, as explicitly stated in the granting clause which covered "all that certain tract of land" and then provided the legal description for the entire quarter section. Additionally, the "lesser interest" clause referred to "the above described land" and stated that royalties should be paid in proportion to the lessor's interest in the "whole and undivided fee," indicating an intent to consider the entire described tract. The dissent emphasized the word "now" in the entirety clause ("If the leased premises are now or hereafter owned in severalty or in separate tracts"), arguing it meant that the ownership status at the time the lease was executed was relevant. At that time, the quarter section was owned in severalty by Paulina Mermis and Holland's successors. Paulina Mermis, having executed the "Ratification of Mineral Deed," knew of Holland's interest and chose to include the entire quarter section in her lease, thereby subjecting her successors to the burdens she chose to impose. Justice Schroeder contended that the majority's interpretation overlooked these explicit recitals. He further distinguished the authorities relied upon by the majority, noting they typically applied to subdivisions occurring after a lease was delivered, which was not the factual situation here. Given the plain and unambiguous language of the lease, the plaintiffs had established a right to their proportionate share of the reserved royalty.
Analysis:
This case is highly significant for clarifying the interpretation and application of entirety clauses in oil and gas leases, especially when mineral interests are fragmented prior to leasing. It establishes a narrow construction of "leased premises" within such clauses, strictly limiting their effect to the interests actually owned and conveyed by the lessor. The decision reinforces the common law non-apportionment rule, meaning that owners of unleased mineral interests, even within a described tract, generally will not benefit from production elsewhere on that tract under a lease they did not join. For future cases, this emphasizes the critical importance for lessees to secure joinder from all mineral interest owners within a tract to ensure a cohesive lease and to avoid disputes over royalty apportionment, as a lessor's intent alone cannot bind non-parties.
