
    [No. 14807.
    Department One.
    August 8, 1918.]
    Walla Walla Oil, Gas & Pipe Line Company, Appellant, v. J. B. Vallentine et al., Respondents.
      
    
    Frauds, Statute of — Conveyance oe Real Estate — On, and Gas Lease. An oil and gas “lease” permitting the licensee to search and dig for oil and gas and appropriate the same upon payment of a royalty, creates only an incorporeal hereditament or chattel interest, in no manner proscribed hy the rules against conveyances or incumbrances of real estate except hy writing; hence the real beneficiaries may he shown hy parol.
    Corporations — Representation by Officers — Notice—Bona Fide Purchaser. A corporation taking oil and gas leases from its officers who had full notice of adverse rights of third persons is not an innocent purchaser.
    Appeal from a judgment of the superior court for Spokane county, Geo. H. Armitage, Judge pro tempore, entered September 26, 1917, upon findings in favor of defendants in an action to establish a trust in oil and gas leases, tried to the court.
    Reversed.
    
      Guy B. Groff and Daniel K. Zimmerman, for appellant.
    
      
      Reported in 174 Pac. 980.
    
   Mitchell, J.

— Appellant, plaintiff, a corporation, was organized in April, 1916, and is engaged in procuring oil and gas leases for the purpose of developing the properties for the production of oil and gas. About the date of organization, defendant employed one Arthur C. Harris, a stockholder, to act as its agent in securing oil and gas leases. It was considered advisable to take the leases in the name of Harris, who later should assign them to the company. Thus acting, Harris obtained a number of such leases in Benton county. All money needed therefor, including the expenses of Harris, was paid by tbe company. A part of tbe paper interest of Harris in some of these leases was assigned by bim as directed by tbe company. A dispute arose between them as to tbe remainder. Harris claimed be owned a portion of them, while tbe company held be bad no beneficial interest in any. Notwithstanding several conferences and demands, Harris refused to assign any of them. Respondent J. B. Vallentine bad already bad correspondence with tbe appellant in regard to selling its stock, and about tbe time Harris commenced to deny.any rights of tbe company in tbe leases Vallentine and Harris planned, and were forming, a corporation known as Spokane Benton Oil and Gras Company. Through bis association with Harris and conferences with tbe officers of tbe appellant, Vallentine learned of tbe trouble about tbe leases, and, being told by tbe appellant they were its property, Vallentine was unwilling to take an assignment of tbe leases from Harris, as be and Harris bad planned, to tbe corporation just formed by bim and Harris, and, reminding appellant of bis close relations with Harris, entered into an arrangement with appellant by which, in consideration of stock to be ■ given him and bis being made a director later on, be Would mediate a settlement between appellant and Harris. Pursuant to their plan, appellant agreed to, and did, prepare a complaint in a suit against Harris, of which be was advised, to establish its ownership of tbe leases, whereupon, and by active negotiations, Vallentine succeeded within a few days in adjusting tbe dispute with Harris, by which, with tbe approval of appellant, Harris retained a small part of tbe leases and assigned tbe rest to Vallentine. A written acquittance of all liability was given to Harris by appellant. Appellant also dropped its suit against Harris. At tbe exchange and delivery of these papers, Vallentine represented appellant. On taking assignments from Harris, it was understood by Mm, Yallentine and appellant that, while they were taken in Yallentine’s name, the transaction was for the benefit of appellant. The assignment was delivered by Vallentine to an officer of the appellant corporation, who bad it recorded at the expense of appellant in the office of the audit- or of Benton county. The reason the assignment was taken in Yallentine’s name was to facilitate his efforts in a scheme by which the S. U. Hale Company should, if possible, be induced to become interested by the use of its machinery and appliances in developing this gas and oil field for appellant. Later, and prior to April 1,1917, it was ascertained the S. U. Hale Company would not become interested. In the meantime, and during February and the early part of March, 1917, respondent J. D. O’Brien and one H. H. Alvis, noticing the activities of appellant, Harris, and Yallentine, learned through conferences with appellant’s officers and Harris that all leases assigned by Harris to Yallentine were as a fact the property of appellant. However, later on, and about March 17,1917, respondent Spokane Wyoming Oil & Gas Company, a corporation, was organized at the instance of O’Brien and Alvis, with them as two of its principal officers. On March 24, 1917, Yallentine assigned to O’Brien one of the leases theretofore assigned to him by Harris, and on the same day 0 ’Brien reassigned it to his company, Spokane Wyoming Oil & Gas Company. On several occasions prior to the present action, and after failure to interest the S. U. Hale Company, appellant offered to deliver to Yallentine the amount of stock he was entitled to according to agreement, and demanded of Yallentine an assignment to it of the leases assigned by Harris to him, appellant having already waived its right of action against Harris on account of procuring assignments from Harris to Vallentine. This demand was positively refused by Vallentine, who denied that appellant ever had any right in the gas and oil contracts. The contracts involved are spoken of as being the common kind of oil and gas leases which permit the lessee (so-called) for a term of years to go upon the land to prospect for oil and gas, mine, and operate tanks, power stations, oil and gas pipe lines, etc., upon a royalty basis or part interest in the output.

This action was commenced about April 16,1917, for a judgment declaring defendants to be the holders in trust of the title to the property involved. Defendants answered, denying generally, upon which pleadings a trial was had, resulting in a dismissal of the cause of action upon the theory that the case was one in which plaintiff was seeking to establish by oral testimony an express trust in real estate, the trial judge remarking that such procedure is not permissible under our statute, although being entirely satisfied by a preponderance of the evidence that the appellant would be entitled to a judgment if nothing more than chattel interests were involved. The Walla Walla Oil, Gas & Pipe Line Company, a corporation, plaintiff below, appeals.

Because of the supposedly migratory character of oil and gas, which are not fixed in place like coal and other solid minerals, such contracts as those involved in this case convey no interest in, nor create any incumbrance upon, the land or any oil or gas found therein. The land is still to be considered in the possession of the grantor; the contract amounts only to a license entitling the licensee to search and dig for oil and gas according to the terms of the grant, and appropriate the produce to his own use on payment of the royalty or proportion without acquiring any property in the minerals until they are severed from the land. They create only an incorporeal hereditament— a right issuing out of or concerning land. Such contract establishes a mere chattel interest, in no manner under the proscription of any rule, statutory or otherwise, against conveyances or incumbrances of real estate or other interests except by writing. The real beneficial owner of such property right may be shown by parol. Funk v. Haldeman, 53 Pa. St. 229; Aaron v. Rothrock, 102 Kan. 272, 169 Pac. 1161; Smith v. Root, 66 W. Va. 633, 66 S. E. 1005, 30 L. R. A. (N. S.) 176; Richlands Oil Co. v. Morriss, 108 Va. 288, 61 S. E. 762.

As to the leases assigned to O’Brien and thence to Spokane Wyoming Oil & Gas Company, respondents O’Brien and Spokane Wyoming Oil & Gas Company claim they are entitled to protection as innocent purchasers. There is some proof from interested parties in favor of such claim, but we are satisfied by the clear preponderance of the evidence that, prior to the transfer to O’Brien by Vallentine, O’Brien and Alvis had full information of appellant’s rights and that the respondent' corporation; which was shortly formed by O ’Brien and Alvis as its leading spirits and officers, is chargeable with that notice and entitled to no protection.

Appellant confesses, however, that Vallentine was to receive some of its stock for his services in adjusting its dispute with Harris, the amount of which we are not advised by the record. This amount will be ascertained by the trial court and, upon delivering it to Vallentine or depositing it in court for him, the trial court will decree a conveyance or assignment to appellant by respondents of all oil and gas leases held by them and mentioned in this cause.

Reversed and remanded with instructions to proceed as herein directed.

Main, C. J., Parker, Tolman, and Fullerton, JJ., concur.  