MEDICINE LODGE INVESTMENTS, L.L.C. v. EAR, INC.

MEDICINE LODGE INVESTMENTS, L.L.C. v. EAR, INC.
2008 OK CIV APP 107
197 P.3d 502
Case Number: 105204
Decided: 08/15/2008
Mandate Issued: 12/05/2008
DIVISION III
THE COURT OF CIVIL APPEALS OF THE STATE OF OKLAHOMA, DIVISION III

MEDICINE LODGE INVESTMENTS, L.L.C., an Oklahoma limited liability company, Plaintiff/Appellant,
v.
EAR, INC., an Oklahoma corporation; and RICHARD D. STANSBERRY, an individual; Defendants/Appellees,
and
DEER CREEK WATER CORPORATION,1 an Oklahoma non-profit corporation, Defendant/Substituted Plaintiff/Appellant,
and
CAROLYN AYERS, an individual, Defendant.

APPEAL FROM THE DISTRICT COURT OF OKLAHOMA COUNTY, OKLAHOMA

HONORABLE CAROLYN RICKS, JUDGE

REVERSED AND REMANDED FOR TRIAL

Tom E. Mullen, FENTON, FENTON, SMITH, RENEAU & MOON, Okahoma City, Oklahoma, and James P. Kelley, KELLEY, KELLEY & GREGORY, Oklahoma City, Oklahoma, for Plaintiff/Appellant Medicine Lodge, L.L.C.,
Robert A. Jackson, JACKSON, HALL & ASSOCIATES, Oklahoma City, Oklahoma, for Defendants/Appellees EAR, Inc. and Richard D. Stansberry,
Steven M. Harris, Michael D. Davis, DOYLE, HARRIS, DAVIS & HAUGHEY, Tulsa, Oklahoma, for Defendant/Substituted Plaintiff/Appellant Deer Creek Water Corporation.

Kenneth L. Buettner, Presiding Judge:

¶1 Plaintiff/Appellant Medicine Lodge Investments, L.L.C. (Medicine Lodge) appeals from the denial of its Motion for New Trial, filed after the trial court granted summary judgment in favor of Defendants/Appellees EAR, Inc., Richard D. Stansberry (collectively, Appellees), Defendant Carolyn Ayers, and Defendant/ Substituted Plaintiff/Appellant Deer Creek Water Corporation (Deer Creek).2 After EAR conveyed real property to Medicine Lodge, a dispute arose over whether the conveyance included water rights. Medicine Lodge filed suit to quiet title to the water rights. Appellees claimed that the water rights had been severed and were not conveyed with the surface. Medicine Lodge countered that a portion of the water rights and the surface were each conveyed to Stansberry, EAR's predecessor in title, who conveyed all of his interest to EAR by quitclaim deed. Deer Creek asserted that the water rights and surface estate merged when both were owned by Stansberry. Medicine Lodge contended that because its deed from EAR did not reserve the water rights, they were included in the conveyance. The trial court found in favor of Appellees and later denied Medicine Lodge's Motion for New Trial. The record shows a dispute of material fact of whether the Warranty Deed to Medicine Lodge failed to reserve the water rights based on mutual mistake. We reverse and remand for trial.

¶2 The record reveals that in 1977, Walter Sitlington, then owner of 160 acres,3 entered a Water Rights Agreement with Deer Creek.4 The Agreement was filed and recorded January 21, 1980.

¶3 In 1979, Sitlington conveyed the quarter-section to J. Craig Ayers and Patricia L. Ayers. The July 2, 1979 Warranty Deed from Sitlington to the Ayerses provided that it was "subject to Water Rights Agreement dated June 29, 1977 between (Sitlington) and (Deer Creek), but hereby conveying to (the Ayerses), all of (Sitlington's) right, title and interest under said agreement." The Ayerses and Deer Creek entered an Amendment to the Agreement in 1980.5

¶5 By Quit Claim Deed dated April 21, 1994, Stansberry conveyed his interest to EAR, a family corporation of which Stansberry is president. The deed provided that Stansberry conveyed all his interest in the described 54.28 acres and it contained no reference to, nor reservation of, mineral or water rights.

¶6 Ten years later, EAR conveyed a portion of the property to Medicine Lodge by Warranty Deed dated July 28, 2004. The deed excepted from the conveyance "covenants, conditions, easements, restrictions and mineral, (sic) reservations or conveyances of record."

¶7 In its Petition, filed August 9, 2005, Medicine Lodge claimed it was the owner of 39% of the water rights in the property described in its Warranty Deed from EAR.

¶8 Appellees answered jointly. They asserted that the water rights had been severed from the surface and were not conveyed to Medicine Lodge. Appellees further claimed that EAR did not have title to the water rights to convey to Medicine Lodge and that EAR's Warranty Deed to Medicine Lodge excluded mineral reservations or conveyances of record. Curiously, though, they also asserted "(c)learly (EAR) and (Stansberry) claim ownership of 39% interest in the water rights pursuant to the water rights agreement and subsequent conveyance to these Defendants of the water rights." Appellees asserted that Medicine Lodge purchased the surface only and that Medicine Lodge was attempting to interfere with their contractual rights under the Water Rights Agreement. Appellees claimed that Medicine Lodge was seeking rights under the Agreement, rather than title to the water underlying the quarter-section.

¶9 Medicine Lodge filed its Motion for Partial Summary Judgment February 16, 2006. It listed one undisputed fact: EAR conveyed certain property to Medicine Lodge by Warranty Deed July 28, 2004, and the deed did not reserve any water rights owned by EAR. Medicine Lodge argued that a deed which does not reserve the water rights conveys the water rights. It further argued that the language in its Warranty Deed excepting mineral conveyances of record did not constitute a reservation of water rights.

¶10 Deer Creek responded that it had no interest in the water rights ownership dispute (except to preserve its rights under the Water Rights Agreement), but it asked the court to enter summary judgment in favor of Medicine Lodge.

¶11 Appellees filed a Response and Opposition to the Motion for Partial Summary Judgment and Counter-Motion for Summary Judgment. They disputed Medicine Lodge's assertion that the Warranty Deed from EAR transferred "any severed contractual water rights." In addition to the facts listed above regarding the conveyances from Sitlington to the Ayerses and then to Stansberry, Appellees asserted it was undisputed that the Mineral Deed by which the Ayerses conveyed 39% of the water rights to the quarter-section to Stanbserry "severed the water rights to the land purchased by Dr. Stansberry;" that "(b)ecause the water rights had previously been transferred by the Mineral Deed (to Stansberry) . . ., the Quit Claim Deed by which the transfer was effected [to EAR] made no mention of the water rights;" that Stansberry purchased the water rights for the use of his family at their home;

¶12 Appellees argued that because the water rights were conveyed to Stansberry by a separate Mineral Deed, they necessarily were not included in the Quit Claim Deed Stansberry later gave to EAR, and were likewise not included in the Warranty Deed from EAR to Medicine Lodge. They further argued that the Warranty Deed to Medicine Lodge excepted "conveyances of record," and they asserted the Mineral Deed from the Ayerses to Stansberry was a conveyance of record.

¶13 Medicine Lodge objected to Appellees' Counter-Motion for Summary Judgment. Medicine Lodge asserted that Appellees' statement of undisputed facts included inadmissable parol evidence purporting to modify or interpret the deeds. Medicine Lodge did not expressly dispute Appellees' assertion that Stansberry met with Medicine Lodge's representative and discussed whether the sale included water rights. Medicine Lodge asserted that statement was inadmissible parol evidence. Medicine Lodge repeated its argument that because a deed which does not reserve the water rights conveys those rights, then the Warranty Deed to Medicine Lodge included the water rights. Medicine Lodge also argued that Appellees had confused the contractual Water Rights Agreement with title to the water rights subject to the Agreement.

¶14 Deer Creek also opposed Appellees' Counter-Motion for Summary Judgment. Deer Creek argued that even if the water rights had been severed by the Mineral Deed, they merged with the surface estate when both were owned by Stansberry. Deer Creek argued that the Quit Claim Deed from Stansberry to EAR conveyed all of Stansberry's interest, which included the water rights because the Quit Claim deed conveyed all of Stansberry's "right, title, and interest, . . . together with all and singular hereditaments and appurtenances thereto belonging . . . ." Deer Creek also argued that the exception in Medicine Lodge's Warranty Deed for mineral reservations or conveyances of record did not result in a reservation of the water rights because the water and surface estates had merged when both were conveyed to Stansberry. Therefore, according to Deer Creek, the water rights were included in the Quit Claim conveyance to EAR, so that the Mineral Deed was no longer an existing conveyance of record.

¶15 The trial court found that "the issue with regard to the ownership of the water rights in question must be found in favor of the Defendants." The court granted Appellees' Counter-Motion for Summary Judgment and denied Medicine Lodge's Motion for Partial Summary Judgment. The trial court later denied Medicine Lodge's Motion for New Trial.

¶16 Summary judgment proceedings are governed by Rule 13, Rules for District Courts, 12 O.S.2001, Ch. 2, App.1. Summary judgment is appropriate where the record establishes no substantial controversy of material fact and the prevailing party is entitled to judgment as a matter of law. Brown v. Alliance Real Estate Group,

¶17 The record and pleadings reveal confusion between property rights in the form of title to the water underlying the surface and contractual rights under the Water Rights Agreement, which is in the nature of a mineral lease. More importantly, however, the record shows disputed facts requiring trial. The dispute is whether EAR's conveyance of 40 acres to Medicine Lodge included 39% of the water rights associated with those 40 acres. While the effect of deeds is normally a question of law, the record here provides some evidence requiring trial of whether there was a mutual mistake of fact requiring reformation of the deed to Medicine Lodge.

¶18 Appellees contend that the water rights were severed and that Stansberry did not convey the water rights in the Quit Claim Deed to EAR. The owner of land owns the water flowing underneath it.

¶19 The only evidence of severance in this case is the fact that the Ayerses conveyed the surface to Stansberry in one deed and conveyed a portion of the water rights in another deed. At least one court has noted that a conveyance of the minerals and surface at the same time to the same party may not indicate a severance and instead may have simply been the form used to convey the surface and minerals where the parties never intended to sever the interests. See Henley v. U.S., 184 Ct.Cl. 315, 396 F.2d 956, 963 (Ct.Cl.1968).

¶20 At least one Oklahoma statute, and a case interpreting it, suggest that water rights remain attached to the surface, although they may be leased as Deer Creek did in this case. Title

¶21 The general rule which emerges from these authorities is that water is presumed to go with a surface conveyance unless contrary intent is specifically and expressly stated. In this case, it is unclear that the water rights related to Stansberry's surface interest were severed simply because the water and surface were conveyed to him in separate deeds on the same date. Nothing in the record here shows that the Ayerses intended to sever the water rights: a conveyance of "surface only" does not expressly reserve water, and indeed, they expressly conveyed the water rights to Stansberry by mineral deed the same day. The bare fact that the Ayerses conveyed to Stansberry a percentage of the water estate related to a larger parcel than the surface acres they conveyed does not show intent to sever the water rights. And, Stansberry undertook no affirmative action during his ownership to express an intent to sever the water rights. Instead, he conveyed his interest by quitclaim deed. Deer Creek asserts that if the water rights were severed, the doctrine of merger applies to join the water and surface estates when both were conveyed to Stansberry.

¶24 Appellees have presented some evidence that Stansberry and Medicine Lodge's agent agreed the water rights were not to be conveyed from EAR to Medicine Lodge. But, the Warranty Deed includes no express reservation of water rights.

¶25 An action to reform a deed is equitable, and in the case of a mutual mistake of fact, equity will correct the mistake. Cunnius v. Fields,

¶26 The record shows that the trial court's decision is contrary to the language of Medicine Lodge's deed, which contained no reservation of water rights. If trial of the issues reveals the language of the conveyance was the result of a mutual mistake of fact, the Warranty Deed may be reformed. If trial shows no mutual mistake of fact, then the plain language of the Warranty Deed requires judgment in favor of Medicine Lodge (now Deer Creek).

REVERSED AND REMANDED FOR TRIAL.

MITCHELL, V.C.J., and BELL, J., concur.

FOOTNOTES

1 By this court's August 6, 2008 Order, Deer Creek Water Corporation was substituted as Plaintiff/Appellant in this case.

2 The summary judgment order stated that it denied "Medicine Lodge's Motion for Partial Summary Judgment and granted EAR's and Stansberry's Motion for Partial Summary Judgment." EAR's and Stansberry's motion was actually styled Counter-Motion for Summary Judgment. The Oklahoma Supreme Court issued an order to show cause directing Medicine Lodge to show that the order disposed of all the parties and claims. (Supreme Court Order, November 1, 2007). The Oklahoma Supreme Court later issued its order recognizing that the summary judgment order disposed of all claims in this case and was therefore a final, appealable order. (Supreme Court Order, November 29, 2007).

We refer to EAR and Stansberry collectively as Appellees because Deer Creek's Response to Petition in Error indicates Deer Creek's position is that Medicine Lodge owns the water rights disputed here, Deer Creek has been substituted as Plaintiff/Appellant, and Ayers has not filed a responsive pleading in the appeal.

3 Described as the SE/4 of Sec. 18-14N-3W in Oklahoma County.

4 The Agreement granted Deer Creek an easement for wells and well houses, and the right to drill two water wells on the property. In the Agreement, Sitlington transferred all rights and interests, except for his own personal stock and domestic use, in the water under the quarter-section to Deer Creek. Sitlington agreed to "obtain legal use of the water rights through proper proceedings before the Oklahoma Water Resources Board, . . . ." The Agreement gave Deer Creek the right to take water from the property for the use of Deer Creek's customers and provided for payment to Sitlington for the water removed (the greater of $.05 per 1,000 gallons or $1,600, per year). The term of the Agreement was forty years unless Deer Creek abandoned or terminated the Agreement before that time. The Agreement provided that it was binding on the parties' successors.

The Agreement is binding on whomever holds title to the water rights subject to the Agreement. The issue in this case is which party owns title to the water underlying the quarter-section.

5 The document titled Amendment to Water Rights Agreement contains no date other than 1980 and it is unsigned. The amendment provided that it was entered in order to obtain an FHA loan. The amendment changed the term of the Agreement to 43 years from June 29, 1977 and changed the requirement for notice of termination of the Agreement.

6 Although it has no relevance to this dispute, for clarity we note the deeds suggest J. Craig Ayers was married to Patricia L. Ayers at the time Sitlington conveyed the property to them in 1979, but he was married to Carol Ann Ayers at the time they conveyed the property to Stansberry.

7 Exhibit 4 to Deer Creek's response to Medicine Lodge's Motion for Partial Summary Judgment is a document titled "Addendum to Contract" dated November 6, 1992. The addendum was signed by J. Craig Ayers, identified as Seller, December 21, 1992 and was signed by Stansberry, identified as Buyer, December 22, 1992. The addendum was not signed by Carol Ann Ayers, nor was it notarized. The addendum provides "(i)t is hereby agreed that 39% of the water rights will be transferred to the Buyer. All other mineral rights will be retained by the Seller. Subject to the contract on water rights with Deer Creek . . ."

8 Medicine Lodge later filed an Amended Petition changing only the metes and bounds description of the property to match the description in the Warranty Deed.

9 Deer Creek had previously filed a separate Answer in which it did not admit or deny Medicine Lodge's claims, but it asked for judgment against Medicine Lodge and in its favor. In its Response to Petition in Error, Deer Creek asserted that Medicine Lodge "is the owner of all water rights related to the 55 acre tract, which constitutes 39% of the water rights to the entire 160 acre tract." The record does not show that Medicine Lodge is the owner of the 55 acre tract. The descriptions of the property conveyed to EAR and from EAR to Medicine Lodge differ, and EAR claims it conveyed 40 acres, out of its 54.28 acres, to Medicine Lodge. Additionally, 39% of the quarter-section is 62.4 acres rather than 54.28 acres. Medicine Lodge sought to quiet title to 39% of the water rights related to its 40 acres. The Warranty Deed from EAR to Medicine Lodge describes the property in metes and bounds, but it does not state the number of acres conveyed.

10 While the purpose of Stansberry's purchase of the water rights is not relevant to this dispute, we note that if Medicine Lodge prevails, Stansberry will continue to hold title to 39% of the water rights in 105 acres and EAR would continue to hold title to 39% of the water rights in 15 acres. Additionally, "any landowner has a right to take groundwater from land owned by him for domestic use without a permit." 82 O.S.2001 §1020.3.

11 A mineral deed which used the terms "mineral," "mineral-product," "mineral substance" and "all salt mineral waters" was held not broad enough to include subterranean waters in Elkhorn Coal Corp. v. Yonts, 262 S.W.2d 384 (Ky. App.1953).

12 The Oklahoma Statutes on stream water use provide for severance of water rights in certain circumstances. 82 O.S.2001 §105.22. However, no similar language is found in the Oklahoma Groundwater Laws, 82 O.S.2001 §1020.1 to §1020.22. "Groundwater" is "fresh water under the surface of the earth regardless of the geologic structure in which it is standing or moving outside the cut bank of any definite stream". 82 O.S.2001 §1020.1(1).

13 The elements required for merger of estates are: 1) two or more distinct estates of greater and lesser rank; 2) a meeting of the estates in one person; 3) coincidence of the time of meeting; 4) an absence of intervening estates; and 5) holding the estates in the same right. 31 C.J.S., Estates, §156. In Paris Bank of Texas v. Custer, 1984 OK 5, 681 P.2d 71, the Oklahoma Supreme Court explained the evolution away from the common law's strict application of merger to a more equitable application dependent on the intent of the party in whom both estates meet. There is a split of authority on the issue of whether a surface estate and a mineral estate can merge. See Humphreys-Mexia Co. v. Gammon, 113 Tex. 247, 254 S.W. 296, 300 (1923) (held, severed minerals which constitute a fee simple interest may not merge with the fee simple interest in the surface because fee simple estates are equal and therefore cannot merge); Sharp v. Fowler, 248 S.W.2d 322, 324 (Tex.Civ.App. 1952) (held, where surface and minerals were conveyed separately to one party, the two interests merged and were later conveyed together in a deed which described the surface and did not reserve the minerals); Hunter v. Rosebud County, 240 Mont. 194, 783 P.2d 927 (1989) (held, a conveyance of previously excepted mineral estate to the owner of the remaining estate merged the two estates);. Com., Marine Resources Commission v. Forbes, 214 Va. 109, 197 S.E.2d 195 (1973) (held where a severed riparian water right and the surface right are owned by the same person, the estates merge). As we note elsewhere in this opinion, the Oklahoma Supreme Court has held that water is not considered a traditional mineral, so it is unclear whether an estate in water is equal to the surface estate in Oklahoma. "Merger is co-extensive with the interest merged, as in the case of joint tenants and tenants in common; and it is only to the extent of the part in which the owner has two several estates. An estate may merge for one part of the land, and continue in the remaining part of it." Clark v. Parsons, 69 N.H. 147, 39 A. 898, 899 (1897). Therefore, although Stansberry held 39% of the water rights to the entire quarter-section, he owned 54.28 acres of surface, so that if merger occurred, the effect would be to merge 39% of the water rights in the 54.28 acres with the surface estate.

14 A Texas decision supports this view. In Graham v. Kuzmich, 876 S.W.2d 446 (Tex.App.1994), the parties agreed that Kuzmich owned 17 acres of surface which he bought by warranty deed. The dispute was over ownership of 15 acres of "class B water rights." The chain of title in Graham was complicated, but broadly the record showed that the 17 acres were conveyed by deed which expressly stated that the appurtenant water rights were included. The grantee later conveyed by warranty deed the 17 acres "together with 15" acres of water rights to Ortiz. Ortiz then gave a deed of trust to a bank as security for a loan. The deed of trust described the 17 acres but did not mention the water rights. After Ortiz defaulted on the loan, the bank purchased the 17 acres at a foreclosure sale and sold the property to Kuzmich. Neither the substitute trustee's deed nor the warranty deed to Kuzmich mentioned the water rights. The appellant sought to establish that the water rights had been severed and were not included in the deeds which did not mention the water rights. The appellate court noted the general rule that deeds are construed to convey the greatest estate possible. Id. at 448. Therefore, a deed which does not include an exception conveys the grantor's entire estate. Id. at 449. The court noted also that reservations and exceptions are construed against the grantor and must be set out in clear language. Id. The court concluded that the deeds which were silent as to water rights conveyed those rights. Id. Additionally, in Hunter v. Rosebud County, supra, the Montana Supreme Court rejected the argument that a quitclaim deed did not convey previously severed minerals where they were owned by the grantor at the time of the quitclaim deed.

15 The exception for mineral conveyances of record is not sufficient because it does not expressly include water and because the Mineral Deed conveyance of water rights to Stansberry was effectively extinguished to the extent Stansberry conveyed the water rights to EAR in the Quit Claim Deed.