SCHLEGEL v MOORHEAD

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No. 13198 I N THE SUPREME COURT O THE STATE OF M N A A F OTN 197 6 E. P. SCHLEGEL, P l a i n t i f f and A p p e l l a n t , SHERMAN MOORHEAD and ROSELLE MOORHEAD, husband and w i f e , Defendants and Respondents. Appeal from: D i s t r i c t Court o f t h e Ninth J u d i c i a l D i s t r i c t , Honorable B. W. Thomas, Judge p r e s i d i n g . Counsel o f Record: For Appellant : Smith, Emmons, B a i l l i e and Walsh, G r e a t F a l l s , Montana Robert J. Emmons a r g u e d , G r e a t F a l l s , Montana F o r Respondents: F r i s b e e and Moore, Cut Bank, Montana John P. Moore a r g u e d , Cut Bank, Montana Submitted: J u n e 2 , 1976 Decided : AUGbq& 1,c-~6 Filed : gv g ;q-J (:?e , *i J u s t i c e John Conway H a r r i s o n d e l i v e r e d t h e Opinion of t h e Court. Mr. P l a i n t i f f a p p e a l s from t h e judgment of t h e d i s t r i c t c o u r t d i s m i s s i n g h i s c o m p l a i n t f o r s p e c i f i c performance o f a n o p t i o n t o p u r c h a s e a f e d e r a l o i l and g a s lease from t h e defendant. The p e r t i n e n t f a c t s a r e s e t f o r t h a s shown by t h e d i s t r i c t c o u r t f i n d i n g s o f f a c t and t h e r e c o r d . Defendant Sherman Moorhead h a s been t h e owner s i n c e 1956 of f e d e r a l o i l and g a s l e a s e number 073 1 5 1 ( a ) , c o n s i s t i n g of 120 acres i n Glacier County, Montana. H e a c q u i r e d t h e l e a s e f o r s a l v a g e and h a s m a i n t a i n e d o n l y one p r o d u c i n g w e l l on t h e a c r e a g e . Said w e l l h a s n o t produced s u f f i c i e n t r e v e n u e t o pay t h e a n n u a l r o y a l t y . A t a l l t i m e s p e r t i n e n t h e r e t o Moorhead employed a pumper who operated t h e well. Moorhead worked i n t h e o i l f i e l d s i n G l a c i e r County from 1937 t o 1964 and i s f a m i l i a r w i t h o i l f i e l d o p e r a t i o n s and terms. H e h a s l i t t l e e x p e r i e n c e w i t h t h e b u s i n e s s end of o i l o p e r a t i o n s , and no p r e v i o u s e x p e r i e n c e w i t h o p t i o n s . W i t h i n t h r e e y e a r s of t h e t i m e o f t h e o p t i o n i n d i s p u t e h e r e , he t w i c e a t t e m p t e d t o s e l l t h e lease w i t h no s u c c e s s . A t no t i m e r e l e v a n t t o t h i s c a s e d i d he make any e f f o r t t o l e a r n of o i l f i e l d developments i n t h e v i c i n i t y of h i s l e a s e by making i n q u i r i e s o f h i s pumper, h i s a t t o r n e y i n t h e a r e a , o r t h e p u b l i c r e c o r d s a t t h e O i l and G a s Commission o f f i c e i n S h e l b y , Montana. Moorhead l i v e d i n B u t t e , Montana from 1964 t o t h e t i m e of t h i s l a w s u i t . P l a i n t i f f S c h l e g e l i s a United S t a t e s c i t i z e n who l i v e d i n C a l g a r y , A l b e r t a , Canada from 1952 t o 1973. H e h a s been en- gaged i n o i l f i e l d s a s a roughneck, h a s s o l d r e a l e s t a t e , and h a s bought and s o l d o i l l e a s e s . H e d e c i d e d t o l e a v e Canada i n 1973 d u e t o h i s d i s s a t i s f a c t i o n w i t h Canadian p o l i t i c s , and res o l v e d t o engage i n t h e o i l b u s i n e s s i n Montana. I n November 1973, S c h l e g e l v i s i t e d t h e O i l and G a s Commission o f f i c e s i n S h e l b y , Montana and m e t a g e o l o g i s t . The g e o l o g i s t recommended Township 37 N , Range 5 W a s a n a r e a t o r e v i e w f o r p o s s i b l e lease o p p o r t u n i t i e s . where Moorhead's l e a s e i s l o c a t e d . T h i s township i s From t h e p u b l i c r e c o r d s i n t h e Shelby o f f i c e o f t h e O i l and Gas Commission S c h l e g e l l e a r n e d t h a t most o f t h e a c r e a g e i n t h a t a r e a was h e l d by Union O i l . Union O i l d e c l i n e d t o farm o u t any a c r e a g e t o S c h l e g e l . From h i s r e v i e w o f t h e r e c o r d s , S c h l e g e l became aware o f t h e l e a s e h e l d by Moorhead. S c h l e g e l l e a r n e d from h i s e x a m i n a t i o n o f t h e p u b l i c r e c o r d s a t Shelby t h a t Union O i l r e c e n t l y had b r o u g h t i n a w e l l d e s i g n a t e d a s "Kruger 4E13", and t h a t t h e w e l l was c a p a b l e o f p r o d u c i n g o i l and g a s i n commercial q u a n t i t i e s . H e a l s o learned t h e f i g u r e s r e p o r t e d f o r t h e e a r l y s t a g e s o f o i l and g a s f l o w , t h a t t h e w e l l w a s l o c a t e d on a c r e a g e a d j o i n i n g l a n d c o v e r e d by t h e Moorhead l e a s e , and t h a t Union O i l had l o c a t e d a n o t h e r d r i l l i n g s i t e , known as "Kruger 5E13", a l s o on l a n d a d j a c e n t t o t h e Moorhead l e a s e . On a d a t e p r i o r t o J a n u a r y 1 2 , 1974, S c h l e g e l made a t e l e p h o n e c a l l t o Moorhead and asked him whether he w a s i n t e r e s t e d i n selling h i s lease. p r i c e o f $5,000. Moorhead r e p l i e d t h a t he was, and set a Three s u b s e q u e n t t e l e p h o n e c a l l s by S c h l e g e l t o Moorhead e s t a b l i s h e d f u r t h e r i n f o r m a t i o n a b o u t t h e l e a s e , and s e t t h e p u r c h a s e p r i c e a t $5,000 p r o v i d e d t h a t Moorhead g i v e S c h l e g e l a 90-day o p t i o n t o p u r c h a s e f o r a $100 c o n s i d e r a t i o n . O J a n u a r y 1 8 , 1974, S c h l e g e l c a l l e d Moorhead and a d v i s e d him n t h a t h e had p r e p a r e d t h e o p t i o n and would come t o B u t t e t o meet Moorhead on t h e f o l l o w i n g d a y t o c l o s e t h e d e a l . Moorhead a g r e e d . On J a n u a r y 1 9 , 1974, S c h l e g e l and h i s w i f e m e t w i t h Moorhead a t a motel i n B u t t e . S c h l e g e l b r o u g h t w i t h him a form of o p t i o n agreement which he had p r e p a r e d . over t h e option. Moorhead t h e n r e a d There was no f u r t h e r d i s c u s s i o n o f t h e t e r m s of t h e o p t i o n , b u t i n t h e c o u r s e o f c o n v e r s a t i o n Moorhead asked S c h l e g e l why he was i n t e r e s t e d i n t h e l e a s e and S c h l e g e l rep l i e d t h a t h e had a g e n e r a l i n t e r e s t i n t h e a r e a and had become d i s s a t i s f i e d w i t h t h e p o l i t i c a l s i t u a t i o n i n Canada. Schlegel d i d n o t t h e n o r a t any t i m e t e l l Moorhead o f t h e i n f o r m a t i o n which S c h l e g e l had o b t a i n e d r e l a t i v e t o t h e w e l l Kruger 4E13 o r t h e l o c a t i o n of Kruger 5E13, b o t h on l a n d a d j o i n i n g l a n d c o v e r e d by t h e Moorhead l e a s e . The o p t i o n w a s s i g n e d by t h e p a r t i e s i n t h e p r e s e n c e of a s i g n i n g w i t n e s s . Moorhead a c c e p t e d from S c h l e g e l a d r a f t f o r $100 a s payment of t h e o p t i o n c o n s i d e r a t i o n . T h e r e a f t e r , on two o c c a s i o n s w i t h i n t h e o p t i o n p e r i o d , S c h l e g e l a c c e p t e d and e x e r c i s e d t h e o p t i o n t o p u r c h a s e Moorhead's l e a s e and t e n d e r e d $4,900 t o Moorhead a s payment t h e r e f o r . Moor- head r e f u s e d t h e t e n d e r and r e f u s e d t o c a r r y o u t t h e o p t i o n on both occasions. S c h l e g e l sued f o r s p e c i f i c performance of t h e o p t i o n t o p u r c h a s e t h e o i l and g a s l e a s e . claimed f o r : Moorheads answered and c o u n t e r - (1) c a n c e l l a t i o n o r r e s c i s s i o n o f t h e o p t i o n on t h e ground of f r a u d ; ( 2 ) damages o f $5,000 f o r s l a n d e r o f t i t l e ; and ( 3 ) a c t u a l damages and exemplary damages f o r f r a u d , t o t a l l i n g $56,000. The d i s t r i c t c o u r t o f t h e n i n t h j u d i c i a l d i s t r i c t , s i t t i n g w i t h o u t a j u r y , Honorable B . W. Thomas p r e s i d i n g , concluded a s a matter of l a w t h a t n e i t h e r p l a i n t i f f n o r d e f e n d a n t - c o u n t e r c l a i m a n t s w e r e e n t i t l e d t o t h e r e l i e f prayed f o r . Judgment was e n t e r e d i n f a v o r of d e f e n d a n t s a g a i n s t p l a i n t i f f ' s c o m p l a i n t ; t h e c o m p l a i n t was d i s m i s s e d ; and judgment was e n t e r e d i n f a v o r of p l a i n t i f f s a g a i n s t d e f e n d a n t s ' c o u n t e r c l a i m . Only t h e p l a i n - t i f f S c h l e g e l a p p e a l s from t h e judgments o f t h e d i s t r i c t c o u r t . The i s s u e s on a p p e a l a r e : 1. Did t h e d i s t r i c t c o u r t err i n r e f u s i n g s p e c i f i c performance of t h e o p t i o n on t h e ground t h a t S c h l e g e l f a i l e d t o i n f o r m Moorhead o f t h e e x i s t e n c e and l o c a t i o n of t h e Kruger w e l l s 4E13 and 5E13? 2. Did t h e d i s t r i c t c o u r t err i n r e f u s i n g s p e c i f i c performance o f t h e o p t i o n on t h e ground of inadequacy o f consideration? 3. Did t h e d i s t r i c t c o u r t err i n c o n s i d e r i n g t h e t e s t i - mony of d e f e n d a n t s ' e x p e r t w i t n e s s ? W e p r e f a c e o u r d i s c u s s i o n of t h e i s s u e s w i t h a s t a t e m e n t of t h e r u l e e n u n c i a t e d i n I n t e r i o r S e c u r i t i e s Co. v . Campbell, 55 Mont. 459, 470, 178 P . 582: "A d e c r e e f o r s p e c i f i c performance i s n o t g r a n t e d a s a m a t t e r of a b s t r a c t r i g h t , b u t i n e v e r y i n s t a n c e t h e a p p l i c a t i o n f o r such r e l i e f i s a d d r e s s e d t o t h e sound, l e g a l d i s c r e t i o n of t h e c o u r t . * * * The c a s e comes w i t h i n t h e g e n e r a l r u l e , o f t e n a d v e r t e d t o by t h i s c o u r t , t h a t i n t h e a b s e n c e of a clear showing of a b u s e o f d i s c r e t i o n t h e d e c i s i o n o f t h e lower c o u r t w i l l be a f f i r m e d . " See a l s o : Babcock v . Engel, 58 Mont. 597, 194 P . 137. The f o c u s of S c h l e g e l ' s a s s i g n m e n t s o f e r r o r i s upon t h e d i s t r i c t c o u r t ' s f i n d i n g o f f a c t No. 25 and c o n c l u s i o n of l a w No. 3 . The former r e a d s : "25. Enforcement of t h e o p t i o n agreement would be u n j u s t and u n r e a s o n a b l e a s t o Moorhead b e c a u s e of ( a ) t h e inadequacy of t h e c o n s i d e r a t i o n , and, ( b ) t h e f a i l u r e of S c h l e g e l t o f u l l y and c a n d i d l y i n f o r m Moorhead of t h e c o m p l e t i o n of Kruger w e l l 4E13 and t h e l o c a t i o n o f Kruger 5E13 when h e rep l i e d t o Moorhead's J a n u a r y 1 9 t h i n q u i r y a s t o why h e was i n t e r e s t e d i n t h e l e a s e . " C o n c l u s i o n s o f l a w No. 3 i s s i m i l a r , o m i t t i n g t h e words " f u l l y and c a n d i d l y " . I t i s c l e a r t h a t s a i d f i n d i n g and c o n c l u s i o n a r e based upon s e c t i o n 17-808, R.C.M. 1947, which s t a t e s i n r e l e v a n t p a r t : "What p a r t i e s c a n n o t be compelled t o perform. S p e c i f i c performance c a n n o t be e n f o r c e d a g a i n s t a p a r t y t o a c o n t r a c t i n any o f t h e f o l l o w i n g cases: "1. I f he h a s n o t r e c e i v e d a n a d e q u a t e c o n s i d eration for the contract; "2. I f i t i s n o t , a s t o him, j u s t and r e a s o n a b l e ; " 3 . I f h i s a s s e n t w a s o b t a i n e d by t h e m i s r e p r e s e n t a t i o n s , concealment, c i r c u m v e n t i o n , o r u n f a i r p r a c t i c e s o f any p a r t y t o whom performance would become due under t h e c o n t r a c t * * * . " A s t o t h e f i r s t i s s u e , Schlegel contends t h a t t h e option t r a n s a c t i o n w a s a t arms l e n g t h and t h e r e was no d u t y upon him t o d i s c l o s e t o Moorhead h i s knowledge g a i n e d from p u b l i c r e c o r d s which were e q u a l l y a c c e s s i b l e t o Moorhead. On t h e o t h e r hand, Moorhead a r g u e s t h a t S c h l e g e l i s g u i l t y of a m u l t i t u d e of f r a u d s , a p o s i t i o n which was r e j e c t e d by t h e d i s t r i c t c o u r t . However, o u r t a s k i s t o d e t e r m i n e whether t h e d i s t r i c t c o u r t abused i t s d i s c r e t i o n i n r e f u s i n g s p e c i f i c performance, and we need n o t r e s o l v e t h e c o n f l i c t i n g arguments of t h e p a r t i e s c o n c e r n i n g a c t u a l and c o n s t r u c t i v e f r a u d and t h e l i k e . I t i s u n d i s p u t e d t h a t S c h l e g e l w a s aware of t h e Kruger w e l l s on J a n u a r y 1 9 , 1974, and of t h e f a c t t h a t t h e y had subs t a n t i a l production p o t e n t i a l . I t i s a l s o e s t a b l i s h e d t h a t when a s k e d "why" h e w a s i n t e r e s t e d i n Moorhead's l e a s e , S c h l e g e l s a i d he had a " g e n e r a l " i n t e r e s t i n t h e a r e a . The q u e s t i o n i s n o t whether S c h l e g e l ' s answer was f r a u d u l e n t o r n o t , b u t whether Moorhead's a s s e n t w a s o b t a i n e d by t h e " m i s r e p r e s e n t a t i o n s , concealment, circumvention, o r u n f a i r p r a c t i c e s " of Schlegel. t i o n 1 7 - 8 0 8 ( 3 ) , R.C.M. 1947. Sec- T h i s d i s t i n c t i o n i s s i g n i f i c a n t be- c a u s e under s e c t i o n 17-808 a c o u r t i n e q u i t y h a s f a r more l a t i t u d e i n a s s e s s i n g t h e conduct of t h e p a r t i e s before i t than does a c o u r t determining t h e l e g a l elements of fraud. As stated i n I n t e r i o r S e c u r i t i e s , supra: " * * * To s e c u r e t h e d e s i r e d r e l i e f [ s p e c i f i c performance] i n t h i s i n s t a n c e , a p p e l l a n t s w e r e required to come into court with clean hands and with a cause whose ethical qualities were such as to commend it to the conscience of the chancellor. * * * " The district court specifically found that Schlegel did not affirmatively misrepresent a lack of development in the area, and this finding is not challenged here. However, it is not necessarily inconsistent for the district court to hold that enforcement against Moorhead would be unjust and unreasonable due to Schlegel's concealment or circumvention in answer to Moorhead's question. In short, we do not find an abuse of discretion on this point. The second issue concerns the inadequacy of the consideration. Section 17-808(1) makes this factor a defense to an action for specific performance of contract. 58 Mont. 597, 194 P. 137. Babcock v. Engel, The district court made no finding as to the specific value of the lease, and Schlegel argues that therefore it cannot properly find, as it did in finding of fact No. 24, that the "option price of $5,000.00 was disproportionate to the real value of the lease in the light of information available from public records on January 19, 1974." We cannot agree with Schlegel's contention. There is ample evidence in the record to show that the Kruger 4E13 and 5E13 wells were in close proximity to Moorhead's lease and were anticipated to be put into commercial production. Kruger 4E13 was shown to have produced substantial quantities of oil, and for the reasons appearing hereafter, it was sufficient to support the findings. The final issue is whether Moorhead's expert witness' testimony should have been considered by the district court. Virgil Chamberlain testified for the Moorheads on the value of the Moorhead lease. His testimony was founded upon his own extensive knowledge and experience in the area, and upon the public records of the production of the nearby Kruger 4E13 well. The objections to this testimony were overruled as to admissibility, but the testimony was weighed in light of the grounds for the objections. Schlegel's assignment of error on this point is related to the second issue, inadequacy of consideration. He argues that Chamberlain's value estimate of over one million dollars is so speculative and inaccurate as to vitiate the district court's finding No. 24 that $5,000 was disproportionate to the value of the lease. However, the district court did not speci- fically refer in its findings on consideration to the valuation given by Chamberlain. Furthermore, as was pointed out in our discussion of the second issue, there is evidence to sustain the district court's finding of inadequacy of consideration independently of Chamberlain's testimony. Therefore, assuming any error in the admission of said testimony, it is harmless and cannot be the basis of a reversal on appeal. Cf. Benner v. B. F. Goodrich Co., 150 Mont. 97, 430 P.2d 648. In view of the foregoing, we hold that the district court did not abuse its discretion by refusing to grant to Schlegel specific performance of the option to purchase Moorhead's oil and gas lease. The judgment of the P\istrict court is affirmed. +*& ---------- ---------------Justice We concur: 4-4c-%!?4 -------- Hon. Edward T. Dussault, district judge, sitting in place of Mr. Chief Justice James T. Harrison.

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