Appeal from the Circuit Court of Wabash County; the Hon.
Robert M. Keenan, Jr., Judge, presiding.
PRESIDING JUSTICE JONES DELIVERED THE OPINION OF THE COURT:
This is a case of first impression in Illinois, presenting the issue of whether the holder of an executive right to a mineral interest has a duty to the owner of a mineral interest subject to that executive right, and, if so, what is the nature and extent of that duty.
The plaintiff, Jessie Schroeder, and the defendant, Frederick Schroeder, were married in 1935 and divorced in 1972. As husband and wife and as tenants in common they had owned, among other real property, the 54 acres involved here. Pursuant to the court-ordered disposition of the parties' property at the time of the divorce, in 1972 the plaintiff, who is a schoolteacher, quitclaimed her interest in the 54 acres to the defendant Schroeder, who is a farmer, reserving her right, title, and interest in the oil, gas and other minerals. She granted to the defendant Schroeder, until his death or until the sale of the property, the exclusive right to lease the reserved mineral interest for the purpose of producing oil, gas, coal and other minerals. On July 29, 1980, the defendant Schroeder executed an oil and gas lease individually and on behalf of the plaintiff, as lessors, with Snyder Drilling and Well Service as lessee.
On December 23, 1982, plaintiff brought suit against the defendant Schroeder as well as Snyder Drilling and Well Service and Farm Bureau Oil Company, Inc. In the complaint she alleged that the defendant Schroeder had executed a lease on behalf of himself and plaintiff to Snyder Drilling and Well Service, which lease provided for a one-eighth royalty to the lessors. The plaintiff alleged further:
"5. At the time defendant, Frederick Schroeder, executed such on plaintiff's behalf, defendant had a fiduciary obligation of utmost fair dealing in leasing her interest.
6. Notwithstanding such obligation and duty, defendant illegally negotiated the lease transaction unfairly to plaintiff and for his own advantage as follows: as consideration for execution of such lease providing for the one-eighth royalty (which will be divided equally between the parties plaintiff and defendant) he took for himself alone an overriding royalty interest in such lease of one-sixteenth of seven-eighths of the gross production and upon such information and belief plaintiff states defendant took certain other bonuses and benefits which he has failed and refused to account for to plaintiff."
The complaint alleged further that the defendant Snyder Drilling and Well Service had drilled one or more producing wells on the property or on premises with which the property is communitized and was selling oil to the defendant Farm Bureau Oil Company, Inc., a pipeline purchaser, which had issued payments to the defendant Schroeder pursuant to the assignment of overriding royalty interest. The plaintiff sought to have the defendant Schroeder ordered to execute an assignment of one-half of the overriding royalty received by him; damages in the amount of $10,000 for monies received by the defendant Schroeder "as payment upon such overriding royalty, bonuses, and rentals"; an order canceling the defendant Schroeder's executive right to lease the plaintiff's oil, gas, and mineral interests without her permission; and reasonable costs. The plaintiff sought to have the defendant Farm Bureau Oil Company ordered to impound all funds representing the defendant Schroeder's overriding royalty from the sale of oil and gas produced pursuant to the lease and the defendant Snyder Drilling and Well Service required to account for all oil and gas representing the overriding royalty interest assigned to the defendant Schroeder.
In paragraph six of the defendant Schroeder's answer he stated:
"As to Paragraph 6 of Count 1 of the Complaint, he admits that, as consideration for execution of such lease providing for the 1/8th royalty, he took for himself alone an overriding royalty interest in such lease of 1/16th of 7/8ths of the gross production, but denies that he took any other bonuses or benefits, and denies that the lease transaction was negotiated by him illegally or unfairly to Plaintiff, and denies the existence of any `obligation and duty' such as is referred to in said Paragraph 6."
In an interrogatory directed to the defendant Schroeder the plaintiff asked him to "[d]describe what agreements, if any, you have made with Snyder Drilling and Well Service and/or Farm Bureau Oil Company, Inc. concerning your receiving an overriding royalty by reason of your execution of a lease covering the lands described in plaintiff's complaint." To this the defendant Schroeder responded: "A copy of the memorialization of the only such agreement is attached hereto, said memorialization being dated July 29, 1980."
At a bench trial the plaintiff testified in her own behalf that around Easter of 1980 she had learned from her son, Brian Schroeder, an adult, that he had arranged for oil leases on his land and on the 54 acres in question, which adjoins his land, and that "he had gotten an override for himself, for his father and for me." The plaintiff said that she had looked into the matter around Easter in 1982 "[s]ince the well had come in in '81 and it's now '82 and we had received no checks." She had, she said, sought to obtain the defendant Schroeder's signature upon an assignment, admitted into evidence as plaintiff's exhibit No. 7, which, had it been executed, would have provided for "an undivided 1/32 X 7/8 overriding royalty interest" each to the plaintiff and the defendant Schroeder as assignees in and to the oil and gas lease of July 29, 1980. The plaintiff testified that the defendant Schroeder had told her, when she had asked him to sign this assignment, that "he already had an assignment of oil and gas lease and there wasn't a damn thing I could do about it" and that with those "exact words" he had ended the conversation. She stated that prior to the divorce she and the defendant Schroeder had leased land for oil and gas development and that they had received "[t]he one-eighth owners' royalty, plus an override." It was "very common to get an override," she said, and the instrument providing for the override "would either be typed into the lease or it would be typed onto an addition and taped to the lease."
Testifying on behalf of the plaintiff, Brian Schroeder stated that he farms with his father, the defendant Schroeder, and is also "in the oil business." He said that he "operate[s] as well as lease[s] for various parties as a lease man, operator," and that he also "pump[s] wells." Prior to 1980 he made an investigation concerning the feasibility of oil and gas production from the 54 acres in question and his own 40 acres to the west in order "[t]o try to get an oil company to go back in and redrill the property." He had, he said, incurred expenses "accumulat[ing] maps and isopachs and well logs from previously drilled producing wells" and in 1980 had contacted Harold Snyder "[t]o see if they would look at the property and see if it was feasible to drill it. They thought it would be feasible and we started to negotiate deals then for the properties involved." The witness leased to Snyder Drilling and Well Service and received, he said, "a thirty-second override for leasing my property. I also encouraged Snyder to look at my father's property and I was in hopes that I might get an override for negotiating that lease." The amount of override the witness receives was, however, stated elsewhere in the record to be one-sixteenth. In further testimony the witness said, "On my father's property, I was hoping that by putting the deal together and going to Snyder's with it that they might offer me an override on the property. It's quite normal for the landman or the fellow who puts the package together to get an overriding royalty." He had, he said, spoken to Harold Snyder "several times" in the spring of 1980 about leasing the 54 acres and had negotiated with Harold Snyder concerning the terms of the lease. He described Harold Snyder as "agreeable to" a "one-eighth standard royalty and a one-sixteenth overriding royalty on both parties." By "both parties" the witness stated that he was referring to himself and his parents. After having negotiated with Harold Snyder, the witness apprised his father of the negotiations. He testified that the defendant Schroeder "was aware that there would be an override on the property" and that his father had "agreed to" the amount of the override, but that when he discussed with his father the possibility of the witness' receiving half of the override, his father stated he "was going to handle the override himself. So I then backed out of the negotiations." The witness likewise told his mother of the terms he had negotiated. The majority of other leases of landowners in the area provide, he said, for "a sixteenth overriding royalty, plus their one-eighth royalty. That carries through from the old agreement with the Skiles Oil Company." The instrument by which the landowner usually gets the overriding royalty, according to the witness, "would either be on the bottom of the original form itself or it would be an Exhibit `A' attached to the lease." On cross-examination he stated that he had had no written authority to negotiate leases for the defendant Schroeder.
Testifying as an expert on behalf of the defendant, Gale Miller stated that he is a "professional landman" and the president of Cedar Resources, Inc., "a brokerage firm, independent landman and oil producing company." A typical royalty interest received by landowners in the Illinois basin is, he said, "an eighth, unless there is a severance, at which time there can be negotiations that would include other interests." Asked whether it is common practice in the Illinois basin to give the surface owner an overriding royalty interest, the witness responded, "It's not uncommon, especially in areas where there are severances, where the surface owner does not own a hundred percent of the minerals." Asked to provide the rationale for this practice, he stated, "The rationale on the part of the lessor, being the surface owner, is that he's going to be subjected to damage, subject to interruptions that the mineral owner is not, and the feeling is getting stronger and stronger that they need some compensation for that." It is, he said, "not unusual any more" in the Illinois basin to give the "landowner" a one-sixteenth of seven-eighths overriding royalty interest. Asked whether he has "ever" been instructed by his clients to offer greater compensation to those who own the surface in addition to the mineral estate, as opposed to a mineral estate only, he responded affirmatively, stating the rationale to be that "it's a free country and the seller has the right to make his own decision. If he has more to sell than another person, he's entitled to more." The witness stated that sometimes "specific cash payments" are made to landowners rather than overrides and that "sometimes they won't execute the lease without [an override]. That's the consideration for the use of their surface." Asked on redirect whether it would be common for surface landowners to take a one-sixteenth of seven-eighths override in consideration for the burdens upon the surface the witness answered, "As compensation, yes, of course." He testified further that the overriding royalty interest is more commonly created in the lease rather than in a separate instrument.
Testifying in his own behalf, the defendant Schroeder stated that he had received a one-sixteenth of seven-eighths overriding royalty interest and that he did not in any way intend to hide this from the plaintiff. He testified that, in order to place tank batteries, topsoil had to be taken from his field to build up the surface over an area that he estimated as being 80 feet long, 60 feet wide, and 8 feet tall. He estimated further that 1,000 yards of topsoil had been moved for this purpose. Other areas had also to be built up to provide two levees, a slough, and a place for the pump jack. Soil was taken from "at least five" acres, with the topsoil being taken to a depth of "probably eight inches." For this damage, he said, Snyder Drilling and Well Service had paid him nothing.
On cross-examination he testified that neither he nor his son Brian had measured the mound of earth created by the tank batteries. He had, he said, "usually" received an overriding royalty any time he had leased. The exhibits indicate that he had leased for oil and gas five times prior to executing the lease of July 29, 1980. On two of the earlier leases admitted into evidence an override was provided for on the face of the lease. There appears to be an override associated with four of the prior leases. In each of the four instances a one thirty-second of seven-eighths overriding royalty interest is specified.
The witness stated that he had received a letter dated July 29, 1980, from Harold Snyder concerning the override in dispute here. The letter, admitted into ...