SMITH et al. v. GUFFEY et al. (two cases), 202 F. 106

MACK, Circuit Judge. The question presented in these cases is whether or not lessees under such oil and gas leases as those under which appellees (complainants in the Circuit Court) claim, will be given the aid of a court of equity, prior to the discovery by them of any oil or gas, for the protection and enforcement of the rights thereby conferred upon them to enter the property and to prospect for oil and gas, as against their lessors and the latters’ grantees (under subsequent leases taken with notice of the prior leases), who have entered upon the premises, dug wells and are barring out the first lessees.

This exact question has been decided against the first lessees under a form of lease identical with those before us by the Supreme Court of Illinois in Ulrey v. Keith, 237 Ill. 284, 86 N. E. 696. In this case, the court, notwithstanding the conceded validity of the lease at law, and its refusal in Poe v. Ulrey, 233 Ill. 56, 84 N. E. 46, at the suit of the lessor, to cancel and annul it in equity, nevertheless denied the lessee the aid! of a court of. equity in the affirmative enforcement of his legal rights thereunder and remitted him to his admittedly inadequate remedy at law.

The only decision, brought to our attention, in which the lessee'under such a lease has been aided in equity, is Pyle v. Henderson, 65 W. Va. 39, 63 S. E. 762. The views of the Illinois court are strongly criticised in 3 Ill. Faw Rev. 43, 601, 608. While the construction given by the Supreme Court of Illinois to such a lease would be followed by this court, involving as it does a question of local law, its decision as to giving or denying equitable remedies for the protection of the legal rights thereby granted would not be binding upon us.

We should therefore be free to consider the question on its merits, unless we are concluded by the decision of this court in Federal Oil Co. v. Western Oil Co., 121 Fed. 674, 57 C. C. A. 428, affirming the decision rendered by Judge Baker in the Circuit Court for the District of Indiana, 112 Fed. 373, dismissing, a bill brought by a lessee under similar circumstances, and thereby denying to him the aid of a court of equity.

That the one is an Indiana while the other is an Illinois lease is not material, inasmuch as the Indiana courts likewise regard the lease as valid at law, and likewise refuse, at the suit of the lessor, to annul it in equity. New American Oil & Mining Co. v. Troyer, 166 Inch 402, 76 N. E. 253, 77 N. E. 739. The terms and provisions of the two leases must therefore be compared, in order to determine whether or not the Federal Oil Co. Case is distinguishable. They differ in two respects: First.

The Indiana lease contains no counterpart to the following clause found in the Illinois lease: “It is agreed that this lease shall remain in force for the term of five years from this date, and as long thereafter as oil or gas, or either of them, is produced therefrom by the” lessee. Second. Each lease recites a consideration for the grant. In the Indiana lease it is $1; in the Illinois lease it is $1 “and the covenants and agreements hereinafter contained on the part of the” lessee.

The Indiana lease contains no express covenant of any kind to be performed by the lessee, prior to the discovery of oil or gas, but the grant is recited to he made on certain conditions.

Among others, is the following: “In ease no well is commenced within one day from this date, then this grant shall become null and void unless second party shall thereafter pay at the rate of $8.75 for each month such commencement is delayed in advance.” The Illinois lease contains the following express covenant: “Second party covenants * * * to complete a well on said premises within nine months from the date hereof, or pay at the rate of 25 cents per year quarterly in advance for each additional three months such completion is delayed from the time above mentioned for the completion of such well until a well is completed.” We shall assume that 25 cents per acre was intended by the parties.

The Indiana lease further provides that “the second party may cancel and annul this contract or any part thereof at any time,” while under the Illinois lease “the second party, upon tlie payment of one dollar ($1) at any time by the party of the second part, heirs or assigns, shall have the right to surrender this lease for cancellation, after which all payments and liabilities thereafter to accrue under and by virtue of its terms shall cease and determine and this lease become absolutely null and void.” Are these differences in the two leases real, and therefore controlling, or only apparent and therefore negligible?

First. The omission of a fixed minimum period in the Indiana lease does not render it void. The only effect is to make the period for prospecting a reasonable, instead of a fixed minimum time.

While a “reasonable time” to enter the premises and prospect thereon is in a sense uncertain, vague, and indefinite, and in these cases dependent upon all of the surrounding circumstances, nevertheless the lessee under such a lease acquires substantial rights, rights which, while they endure, will receive the same consideration and protection, at law and in equity, as will those of a lessee whose period for entry and prospecting is definitely fixed. This has been expressly held in New American Oil & Mining Co. v. Troyer, 166 Ind. 402, 76 N. E. 253, 77 N. E. 739, andl in other cases therein cited. Second.

A nominal consideration is sufficient at law; equity requires a substantial consideration. In both cases, the purpose of the grant is to secure for the lessor not the one dollar, but the oil and gas. In both, the lessee covenants to pay over a percentage of any oil produced and to make substantial annual payments for any gas marketed. As a consideration, however, for the right to enter and prospect until oil or gas shall be found), the Indiana lessee has paid only the nominal sum of $1; he has not entered into any covenants as an additional consideration for this right.

True, he may lose his rights unless he performs the condition of digging a well or of making, the specified monthly payments; but the lessor cannot compel him by suit either to make the payments or to dig a well. The option is with the lessee. This results, moreover, not only from his failure to make any such promise, and from the substitution of a condition for a covenant, but also from the express provision whereby the lessee could annul the contract at any time.

The Illinois lessee, on the other hand, must, apparently at least, either dig a well within nine months or pay the specified! sum quarterly in advance for at least five years, unless in the meantime he shall have dug a well. And if this apparent obligation were actually enforceable, there would be no difficulty in distinguishing the Indiana lease case and in protecting the prior lessee in equity,'as was done in Gillespie v. Fulton Oil & Gas Co., 236 Ill. 188, 86 N. E. 219, decided less than two months before Ulrey v. Keith, supra.

Is this obligation of these Illinois lessees, however, really or only apparently enforceable? The surrender clause gives them the right at any time, before or after the expiration of the nine.months, to absolve themselves from any further liability. If they exercise this right, if they surrender the lease as, at their absolute option, they are empowered to do, they are thereafter just as free from any obligation enforceable by the lessor, as is the Indiana lessee.

True, they must pay $1 and perhaps make an actual surrender; but this purely nominal obligation cannot change the rights of the parties in a court of equity. That the complainants, long after defendants had discovered oil and gas on the premises, in fact, after the testimony in the case had been taken, filed a so-called stipulation, waiving this right to surrender, a right no longer of the slightest value, cannot retroactively perfect the lease or the bill of complaint. Inasmuch, therefore, as there is no substantial distinction between the present cases and the Federal Oil Co.

Case, the decree of the Circuit Court must be reversed, and the causes remanded to the District Court for the Eastern District of Illinois, with direction to dismiss the bills of complainant for want of equity. ' -