Under the settled rule of decision in Illinois, an oil and gas
lease like that involved in this suit passes to the lessee, his
heirs and assigns, a present vested freehold interest in the
premises, and an option on the part of the lessee to surrender does
not create a tenancy at will, give the lessor an option to compel
surrender or make the lease void as wanting in mutuality.
Decisions of the highest courts of the state in which the
property is situated are accepted and applied by tho federal courts
as rules of property in passing upon the estate and rights passing
by such a lease.
Where, as is the case in Illinois, the holder of such a lease
cannot maintain ejectment in the state courts, he cannot, under §§
721 and 1914, maintain such an action in the federal courts in that
state.
Where ejectment cannot be maintained by one holding a gas and
oil lease against another claiming under a later lease, and no
other action affords an adequate remedy, the earlier lessee may
maintain a suit in equity to restrain the later lessee and for
accounting and discovery in the federal courts where the requisite
amount is involved and diverse citizenship exists, even though such
a suit, by reason of the lessee's having an option to surrender,
could not be maintained in the courts of the states.
Remedies afforded and modes of procedure pursued in the federal
courts sitting as courts of equity are not determined by local laws
or rules of decision, but by general principles, rules, and usages
of equity having uniform operation in those courts wherever
sitting.
According to the general principles and rules of equity enforced
in the federal courts, a clause in a lease permitting the lessee to
surrender it is not an obstacle to enforcing the lease in equity
against those who, under a later lease, are committing waste.
Whether a lease is so unfair and inequitable that it cannot be
enforced by the lessee in equity must be determined in view of the
circumstances under which it was given, and, in this case,
held that an oil and gas lease of undeveloped land
requiring all expenses to be paid by the lessee and providing for
reasonable royalties and fixed rental
Page 237 U. S. 102
during a designated period of delay is not so unfair and
inequitable as to require that equitable relief be withheld, even
where it contains a provision permitting the lessee to surrender it
at any time.
Under the statutes of Illinois, a lessee who omits to pay rent
when due may cure his default by payment at any time prior to
demand and notice or within the time named in the notice, and if so
paid, the lessee's rights are the same as though the default had
not occurred. On an accounting for oil and gas taken under color of
a lease later than that of plaintiff but without actual knowledge
thereof, although the same was recorded,
held that the
later lessees were entitled to be credited with the cost of
improvements and operation incurred prior to, but not after, the
date on which they were actually notified of the rights of the
earlier lessee. The continued taking thereafter was a willful
taking and appropriation of the property of another.
202 F. 106 reversed.
The facts are stated in the opinion.
Page 237 U. S. 108
MR. JUSTICE VAN DEVANTER delivered the opinion of the Court.
This was a suit in equity, brought in the Circuit Court of the
United States for the Eastern District of Illinois,
Page 237 U. S. 109
by the holders of an oil and gas lease covering a small tract of
land in Crawford County, Illinois, to enjoin operations under a
later and similar lease and to obtain a discovery and an accounting
in respect of the oil and gas produced and sold in the course of
operations already had. In due course, the case was referred to a
master, who took the evidence, reported the same with his
conclusions upon questions of fact and law, and recommended a
decree awarding the relief prayed, but taking no account of the gas
theretofore used or sold. Exceptions to the report were filed by
the defendants, and at the final hearing, the circuit court
overruled the exceptions, confirmed the report, and entered a
decree as recommended. The decree was reversed by the circuit court
of appeals with a direction that the bill be dismissed, the ground
of decision being that the complainants were not entitled to relief
in equity, and should be remitted to such remedy as they might have
at law, because, by the terms of their lease, they had an option to
surrender it at any time. 202 F. 106. Other questions in the suit
were not considered by that court. The case is now here upon a writ
of certiorari.
Both leases were for the same tract, and were given by James A.
Smith, who owned it in fee simple. The earlier lease was given to
one Walton, May 22, 1905, and by two successive assignments made in
November and December following was transferred to Joseph F. Guffey
and others, the complainants. It and the assignments were properly
recorded June 15, 1906. The later lease was given to one Allison
August 9, 1906, was assigned shortly thereafter to one Willett, and
was transferred March 25, 1907, to Solley, Johnson, and Hennig,
three of the defendants. There was also an intermediate lease to
one Wilcox, given March 23, 1906, but, as it was voluntarily
surrendered and nothing is claimed thereunder, it suffices to say
(a) that it contained a provision whereby the lessee
Page 237 U. S. 110
therein agreed to protect the lessor against any expense or
damage that might arise by reason of the earlier lease, (b) that,
before surrendering it, Wilcox drilled a well upon the premises in
an effort to find oil and gas, but without success, and (c) that
the complainants, upon learning of this lease, promptly served upon
Wilcox and the lessor a notice asserting the rights conferred by
the prior lease.
Allison and his immediate assignee, Willett, took the subsequent
lease with actual notice of the earlier one, and with constructive,
if not actual, notice of its transfer to the complainants, but made
no inquiry of the latter respecting its status or their claim under
it. Nothing was done under the subsequent lease by Allison, but
after its assignment to Willett, the latter entered upon the
premises, with the lessor's sanction, and drilled a well which
yielded a flow of gas, but no oil. Upon learning of these drilling
operations, the complainants, in a written notice to Willett and
the lessor, again asserted their claim under the prior lease, and
demanded that the operations cease.
Solley and his associates took the assignment from Willett
without actual knowledge of the prior lease, but, under the local
law, were constructively charged with notice of it and of its
transfer to the complainants, for both were duly recorded. They
acted upon the advice of an abstractor who failed to make a proper
examination of the records. After receiving the assignment, Solley
and his associates, with the lessor's approval, proceeded to drill
other wells upon the premises and developed the presence therein of
oil in paying quantities. On August 1, 1907, they were actually and
fully informed of the prior lease and of the complainants' purpose
to insist upon the rights conferred by it and to obtain redress for
the invasion of those rights, but they persisted in their drilling
operations and produced and sold from the premises large quantities
of oil. These operations were being continued when the suit was
Page 237 U. S. 111
brought (March 24, 1908) and when the accounting was had before
the master. Most of the oil taken from the premises was extracted
and sold after August 1, 1907, the date when Solley and his
associates were actually and fully informed of the complainants'
claim.
In its terms, the prior lease of May 22, 1905, under which the
complainants claim, substantially conforms to one in common use in
unexplored territory, as is shown by the evidence in this case and
by reported decisions in other cases. It recites that it was given
in consideration of $1 paid to the lessor and the covenants and
agreements of the lessee therein set forth. It contains the usual
words of grant and demise, runs to the lessee, Walton, his heirs
and assigns, describes the purpose for which it was given as that
of mining and operating for oil and gas and laying pipelines and
building tanks and other structures to take care of those
substances when produced, and defines the terms for which it was to
endure as five years from its date "and as long thereafter as oil
or gas or either of them is produced" from the premises. The lessee
covenants and agrees therein first, to deliver to the lessor, free
of cost, in the pipeline to which the wells may be connected, the
equal one-eighth part of all oil produced and saved from the
premises; second, to pay $100 per year for the gas from each gas
well the product of which is marketed and used off the premises;
third, to locate all wells so as to interfere as little as possible
with the cultivated portions of the land, and fourth, to complete a
well on the premises within nine months after the date of the
lease, or to pay at the rate of twenty-five cents per acre per
year, quarterly in advance, for the additional time the completion
of a well is delayed beyond the nine months, such payments to be
made directly to the lessor, or deposited to his credit in the
Exchange Bank at Martinsville, Illinois. There is also a surrender
clause to the effect that, "upon the
Page 237 U. S. 112
payment of one dollar at any time," the lessee, his heirs or
assigns, "shall have the right to surrender this lease for
cancellation, after which all payments and liabilities thereafter
to accrue" thereunder "shall cease and determine."
Among the master's findings and conclusions which were approved
by the circuit court were the following:
"The master further finds that the complainants have been at all
times financially responsible and able to perform the covenants of
their lease; that they have not drilled a well on said premises,
but that they have paid all the rentals required by the terms of
said lease to be paid at the rate of twenty-five cents per acre,
and deposited the same in the bank designated in the lease to
receive the same, for the owner of the land."
"That, prior to purchasing the Allison lease, Willett made
inquiry by telephone of the Exchange Bank at Martinsville whether
or not rentals had been paid on the Walton lease by the
complainants, and was informed by the bank that no such payments
had been made or deposited to the credit of James A. Smith,
although, as a matter of fact, the master further finds that, at
the time the said bank gave this information, the rental money had
in fact been deposited to the credit of the said James A.
Smith."
"That the Walton lease, under which complainants claim title,
has never been forfeited for failure to comply with the terms
thereof, and up to the time of the filing of this suit, no grounds
existed whereby such a forfeiture could be declared."
In addition to Solley and his associates, the defendants to the
suit included the lessor and the Ohio Oil Company, the latter
having purchased the oil with knowledge of the premises from which
it was produced and of the complainants' claim under the prior
lease.
It is settled by the decisions of the Supreme Court of
Page 237 U. S. 113
Illinois that an oil and gas lease like that of the complainants
passes to the lessee, his heirs and assigns, a present vested right
-- "a freehold interest" -- in the premises, that this interest is
taxable as real property, and that the clause giving the lessee an
option to surrender the lease at any time is valid, does not create
a tenancy at will or give the lessor an option to compel a
surrender, and does not make the lease void as wanting in
mutuality.
Bruner v. Hicks, 230 Ill. 536, 540, 542;
Watford Oil & Gas Co. v. Shipman, 233 Ill. 9, 13, 14;
Poe v. Ulrey, 233 Ill. 56, 62, 64;
Ulrey v.
Keith, 237 Ill. 284, 298;
People v. Bell, 237 Ill.
332, 339;
Daughetee v. Ohio Oil Co., 263 Ill. 518, 524.
These decisions constitute rules of property, and must be accepted
and applied in passing upon the complainants' rights.
McGoon v.
Scales, 9 Wall. 23,
76 U. S. 27;
Bucher v. Cheshire Railroad, 125 U.
S. 555,
125 U. S. 583;
Barber v. Pittsburgh &c. Ry., 166 U. S.
83,
166 U. S.
99.
It also is settled that in the courts of Illinois the holder of
such a lease cannot maintain an action of ejectment thereon
(
Watford Oil and Gas Co. v. Shipman, supra, p. 12;
Gillespie v. Fulton Oil and Gas Co., 236 Ill. 188, 206),
and, by reason of the legislation of Congress requiring that in
actions at law in the federal courts of first instance effect shall
be given to the local laws and modes of proceeding (Rev.Stat. §§
721, 914), it results that the complainants could not have
maintained an action of ejectment in the circuit court. An action
for damages, of course, would not have afforded a plain, adequate,
and complete remedy in the circumstances, and if such a remedy was
to be had, it was necessary to resort to a suit in equity for an
injunction, discovery, and accounting, as was done.
Joy v. St.
Louis, 138 U. S. 1,
138 U. S. 46;
Coosaw Mining Co. v. South Carolina, 144 U.
S. 550,
144 U. S. 567;
Franklin Telegraph Co. v. Harrison, 145 U.
S. 459,
145 U. S. 474.
Thus, the principal question for decision is whether such a suit
could be successfully maintained in the circuit court,
Page 237 U. S. 114
diverse citizenship and the requisite jurisdictional amount
being conceded.
The Supreme Court of Illinois, while fully sustaining the right
to maintain such a suit in the courts of the state when the lease
contains no clause giving the lessee an option to surrender it
(
Gillespie v. Fulton Oil and Gas Co., supra), holds that
the presence of such a clause in the lease operates to prevent the
lessee from directly or indirectly enforcing it in equity
(
Watford Oil and Gas Co. v. Shipman, and
Ulrey v.
Keith, supra) the ground of distinction being that the
surrender clause, although lawful in itself and not affecting the
validity of the lease, renders it so lacking in mutuality that
equity will remit the lessee to his remedy at law. These decisions,
it is insisted, should have been accepted and applied by the
circuit court. To this we cannot assent. By the legislation of
Congress and repeated decisions of this Court, it has long been
settled that the remedies afforded and modes of proceeding pursued
in the federal courts, sitting as courts of equity, are not
determined by local laws or rules of decision, but by general
principles, rules, and usages of equity having uniform operation in
those courts wherever sitting. Rev.Stat. §§ 913, 917;
Neves v.
Scott, 13 How. 268,
54 U. S. 272;
Payne v. Hook,
7 Wall. 425,
74 U. S. 430;
Dodge v. Tulleys, 144 U. S. 451,
144 U. S. 457;
Mississippi Mills v. Cohn, 150 U.
S. 202,
150 U. S. 204.
As was said in the first of these cases:
"Wherever a case in equity may arise and be determined, under
the judicial power of the United States, the same principles of
equity must be applied to it, and it is for the courts of the
United States, and for this Court in the last resort, to decide
what those principles are, and to apply such of them to each
particular case as they may find justly applicable."
It next is insisted that, according to the general principles
and rules of equity administered in the federal courts, the
surrender clause constitutes an insuperable obstacle
Page 237 U. S. 115
to granting the relief sought, the argument being that, as the
complainants have a reserved option to surrender the lease at any
time, it cannot be specifically enforced against them, and
therefore cannot be similarly enforced in their favor. The rule
intended to be invoked has to do with the specific performance of
executory contracts, is restrained by many exceptions, and has been
the subject of divergent opinions on the part of jurists and text
writers. Without considering it in other aspects, we think it is
without present application. Rightly understood, this is not a suit
for specific performance. Its purpose is not to enforce an
executory contract to give a lease, or even to enforce an executory
promise in a lease already given, but to protect a present vested
leasehold, amounting to a freehold interest, from continuing and
irreparable injury calculated to accomplish its practical
destruction. The complaint is not that performance of some promised
act is being withheld or refused, but that complainants' vested
freehold right is being wrongfully violated and impaired in a way
which calls for preventive relief. In this respect, the case is not
materially different from what it would be if the complainants were
claiming under an absolute conveyance, rather than a lease. In a
practical sense, the suit is one to prevent waste, and it comes
with ill grace for the defendants to say that they ought not to be
restrained because, perchance, the complainants may sometime
exercise their option to surrender the lease. We think this option,
which has not been exercised and may never be, is not an obstacle
to the relief sought.
Another contention of the defendants is that the lease is so
unfair and inequitable in its terms that relief in equity should be
withheld and the complainants left to seek a remedy at law; which
is tantamount to saying that they must submit to the practical
destruction of their leasehold and accept such reparation as may be
obtained through recurring actions for damages. Whether
Page 237 U. S. 116
the lease is unfair and inequitable must be determined in view
of the circumstances in which it was given.
Willard v.
Tayloe, 8 Wall. 557,
75 U. S.
570-571;
Rutland Marble Co. v.
Ripley, 10 Wall. 339,
77 U. S. 357;
Franklin Telegraph Co. v. Harrison, 145 U.
S. 459,
145 U. S. 473.
They were these: whether the leased tract contained oil or gas was
not known. It was in an undeveloped district in which there was no
oil or gas well and no pipeline leading to a market. Drilling wells
was attended with large expense, the cost of each well being
upwards of $1,000 according to the testimony of one of the
defendants. No fraud, deception, or overreaching was practised in
procuring the lease. The parties were competent to contract with
each other, and entered into the lease because, in the
circumstances, its provisions were satisfactory to them. Under its
terms, the cost of the drilling was to be borne by the lessee. If
the undertaking was unsuccessful, he alone was to stand the loss,
and if it was successful, the lessor was to share in the results by
receiving substantial royalties, the reasonableness of which is not
questioned. The consideration for the lease,
viz., one
dollar paid to the lessor and the covenants and agreements of the
lessee, cannot be pronounced unreasonable. Similar leases, resting
upon a like consideration, often have been sustained in cases not
distinguishable from this.
* The lease was to
remain in force five years and as much longer as oil or gas was
being produced from the premises; in other words, it was to expire
in five years unless oil or gas was produced within that time. The
lessee expressly covenanted to drill a well within nine months or
to pay a
Page 237 U. S. 117
rental of twenty-five cents cents per acre per year, quarterly,
in advance, for such time as the completion of the well was delayed
beyond that period, the delay, of course, not to extend beyond the
primary term of five years. The terms of the covenant doubtless
were suggested by the undeveloped condition of the district and by
the expense and risk incident to exploring for oil and gas. They
evidently were satisfactory to the lessor at the time, and the
record discloses no reason for holding that, in the circumstances,
they were unreasonably liberal to the lessee. Some criticism is
directed against the reserved option to surrender, but it is
difficult to perceive how it could be declared inequitable. If it
was not exercised, the lessee would be bound by his covenants, and
if exercised, the lessor would be free to deal with the premises as
he chose. A surrender was not to affect any existing liability, but
only to avoid those "thereafter to accrue." A like clause is in the
subsequent lease, and, according to the evidence and several
reported decisions, is of frequent occurrence in such instruments.
We conclude that there is nothing in the terms of the lease which
requires that equitable relief be withheld.
While the complainants, as found by the master, paid all the
rental required by the terms of the lease, and while they paid most
of it in advance of the time stipulated, the first two payments
were not seasonably made, and this is urged as a ground for
refusing equitable relief. The objection is not well taken. The
rental was not in arrears when the subsequent lease of August 9,
1906, was given, and there was no attempt at any time to forfeit or
put an end to the lease because of the omissions to pay strictly in
advance. While there was no provision in the lease for a
forfeiture, the subject was covered by an Illinois statute. Hurd's
Rev.Stat. of 1905, c. 80, § 8. Under it, the lessor could have
demanded the rent in arrears and have notified the complainants in
writing that, unless
Page 237 U. S. 118
payment was made within a time named in the notice, not less
than five days thereafter, the lease would be terminated, and upon
a failure to pay within that time, he could have treated the lease
as ended. But there was no such demand or notice, and consequently
no failure to comply with either. As interpreted by the supreme
court of the state, the statute confers upon a lessee who omits to
pay rent at the time it is due a right to cure his default by
paying at any time prior to demand and notice or within the time
named in the notice.
Chadwick v. Parker, 44 Ill. 326;
Chapman v. Kirby, 49 Ill. 211;
Woods v. Soucy,
166 Ill. 407. Here, the default was cured in advance of any demand
or notice, and thereafter the complainants' rights were the same as
if the default had not occurred.
In the accounting, Solley and his associates were charged with
the value, in the pipeline where the same was sold, of all the oil
taken by them from the premises, save the one-eighth part going to
the lessor as a royalty, and error is assigned upon this because no
deduction was made for the cost of the improvements and operations
whereby the oil was taken from the earth and delivered at the
pipeline. As respects the cost incurred prior to August 1, 1907, we
think the objection is well taken, for, up to that time, Solley and
his associates were in actual ignorance of the earlier lease, and
were proceeding in the honest belief that the later lease, assigned
to them by Willett, was the only one upon the premises. They paid a
substantial sum for it, were let into possession by the lessor, and
were not conscious that they were invading the rights of others.
True, the prior lease had been properly recorded, but, as they
consulted an abstracter before consummating the transaction with
Willett and were advised that the title was clear, the constructive
notice resulting from the recording of the prior lease was not
inconsistent with an honest, though mistaken, belief on their
part
Page 237 U. S. 119
that they had acquired a perfect right to take and dispose of
the oil. But the expenses incurred after August 1, 1907, are upon a
different footing. On that date, Solley and his associates were
actually and fully informed of the prior lease and of the
complainants' purpose to insist upon the rights conferred by it and
to obtain redress for the invasion of those rights, so what was
done thereafter cannot be regarded as anything less than a willful
taking and appropriation of the oil which was subject to the
complainants' superior right. These views are amply sustained by
our decisions.
Woodenware Co. v. United States,
106 U. S. 432;
Benson Mining Co. v. Alta Mining Co., 145 U.
S. 428,
145 U. S. 434;
Pine River Logging Co. v. United States, 186 U.
S. 279;
United States v. St. Anthony Railroad,
192 U. S. 524,
192 U. S. 542.
See also Central Coal Co. v. Penny, 173 F. 340;
Bender
v. Brooks, 103 Tex. 329;
Gladys City Oil Co. v. Right of
Way Oil Co., 137 S.W. 171, 182.
We conclude that the decree in the circuit court was right, save
that the accounting should have proceeded along the lines just
indicated, and those improvements the cost of which should have
been deducted in the accounting -- that is, those made before
August 1, 1907 -- should have been awarded to the complainants.
The decrees below are reversed, and the cause is remanded to the
district court, as successor to the circuit court, with directions
that the accounting and the decree be conformed to the views herein
expressed.
Decree reversed.
*
See Allegheny Oil Co v. Snyder, 106 F. 764;
Brewster v. Lanyon Zinc Co., 140 F. 801;
Brown v.
Fowler, 65 Ohio St. 507;
Gas Co. v. Eckert, 70 Ohio
St. 127;
Venedocia Oil Co. v. Robinson, 71 Ohio St. 302;
Lowther Oil Co. v. Guffey, 52 W.Va. 88;
Pyle v.
Henderson, 65 W.Va. 39;
Brick Co. v. Bailey, 76 Kan.
42;
Gillespie v. Fulton Oil Co., 236 Ill. 188.