Opinion
No. 77-967
Decided December 21, 1978. Rehearing denied January 18, 1979. Certiorari granted March 19, 1979.
In quiet title action concerning an overriding royalty on an oil and gas lease, the priority of the various claimants was dependent upon whether Colorado Recording Act was of race-notice or pure notice type. From judgment entered in favor of defendant, plaintiff appealed.
Reversed
1. RECORDS — Recording Act — Pure Notice Statute. The Colorado Recording Act, § 38-35-109, C.R.S. 1973, is a pure notice statute.
2. Overriding Royalty — Oil and Gas Lease — Recording — Bureau of Land Management — Not — Constructive Notice — Real Property Interest. The recording of an overriding royalty on an oil and gas lease with the Bureau of Land Management is not sufficient to constitute constructive notice of an interest in real property.
Appeal from the District Court of the County of Rio Blanco, Honorable Garvin D. Litwiller, Judge.
Dufford, Waldeck Williams, Hugh D. Wise, for plaintiffs-appellants.
Paul C. Lennartz, for defendant-appellee.
This is a quiet title action. Plaintiffs, Fees-Krey, Inc., appeal from a judgment quieting title in defendant, Page, Jr., on his counterclaim to a 2% overriding royalty on an oil and gas lease. Defendant never recorded his interest pursuant to the Colorado Recording Act, § 38-35-109, C.R.S. 1973, and plaintiffs subsequently acquired the lease without notice of defendant's overriding royalty. Neither plaintiffs nor any grantees prior to plaintiffs recorded their interests in the lease. Plaintiffs contend that § 38-35-109, C.R.S. 1973, is a pure notice statute, and that therefore plaintiffs have priority over defendant, because plaintiffs acquired their interest without notice. Defendant argues that the statute is a race-notice statute, or, in the alternative, that plaintiffs had constructive notice of defendant's interest by virtue of defendant's having recorded his interest in the records of the Bureau of Land Management.
We hold that the statute is a pure notice statute and that recording with the Bureau of Land Management does not constitute constructive notice of a prior interest. Because defendant's interest is cut off by his failure to record, we need not decide whether it was extinguished by merger of leasehold interests in the hands of a subsequent grantee.
The case arises out of a complex series of conveyances of interests in an oil and gas lease. In 1951, the United States as lessor and one Marie Maroney as lessee entered into an oil and gas lease covering certain property in Rio Blanco County, Colorado. In 1955, after several intermediate conveyances, the Phillips Petroleum Company (Phillips) acquired all interest in the base lease. In March 1960, Phillips conveyed to defendant an undivided one-half of the working and operating rights under a portion of the lease. Phillips specifically reserved all leasehold rights not conveyed to defendant and stipulated that if defendant breached any of the covenants contained in the lease, his rights would terminate and revert to Phillips. In April 1960, defendant conveyed to Page, Sr., his working and operating rights, subject to a 2% overriding royalty. This later instrument and all subsequent instruments of conveyance or assignment referred to in this opinion were recorded with the Bureau of Land Management but not recorded in the office of the County Clerk and Recorder of Rio Blanco County. Page, Sr., later assigned 1/4 of his interest to one Beardmore, subject to defendant's overriding royalty.
In July 1966, Phillips assigned to Shawnee Oil Development Co., Inc., (Shawnee) all of its interest in the 1951 oil and gas lease. In August 1966, Page, Sr., and Beardmore assigned to Shawnee all their working and operating rights. This instrument provided that the assignment was subject to all outstanding royalties or other burdens of production but did not specifically refer to defendant's 2% overriding royalty. Shawnee had no actual or constructive notice of defendant's interest. Three days later Shawnee assigned to plaintiffs all its interest in the 1951 lease. Plaintiffs first learned of defendant's interest 21 years later when in 1972 defendant demanded payment for overriding royalties. Plaintiffs then filed this quiet title action.
The issue whether § 38-35-109, C.R.S. 1973 is a pure notice or a race-notice type of statute is critical in this case because the characterization will determine the priority between the competing interests. An overriding royalty carved out of the working interest in an oil and gas lease is an interest in real property, Hagood v. Heckers, 182 Colo. 337, 513 P.2d 208 (1973); Globe Drilling Co. v. Cramer, 39 Colo. App. 153, 562 P.2d 762 (1977), and is therefore subject to the rules of priority of the Recording Act. If the statute is a race-notice type, a subsequent purchaser will prevail over a prior unrecorded interest only if he purchases without notice and records his interest before the prior interest is recorded. Even if the prior interest is never recorded, the subsequent purchaser must record his own interest before he can assert priority. Thus defendant would have priority here because plaintiffs, though subsequent purchasers without notice, failed to record. If, on the other hand, the statute is a pure notice statute, a subsequent purchaser who purchases without notice of a prior interest prevails over a prior unrecorded interest even though the subsequent purchaser does not record. Thus, plaintiffs, having purchased without notice of defendant's overriding royalty, would prevail under a notice type statute.
To support his argument that the statute is a race-notice type, and that plaintiffs cannot prevail without having first recorded their interest, defendant cites Eastwood v. Shedd, 166 Colo. 136, 442 P.2d 423 (1968), and Plew v. Colorado Lumber Products, 28 Colo. App. 557, 481 P.2d 127 (1970) wherein the courts either characterized or implicitly treated the statute as a race-notice statute. In neither case, however, was the characterization of the statute directly in issue. In Eastwood the issue was whether a donee was protected by the statute; in Plew the question was whether the statute protected a subsequent purchaser who had not yet paid full value, but who had recorded his contract of purchase. In neither case had the prior purchaser recorded before the subsequent purchaser recorded his interest. In both cases the subsequent party in interest would have had priority under either a notice or a race-notice type statute.
[1] Because the characterization of the statute was dictum in Eastwood and was not directly addressed in Plew, we do not feel constrained to adopt the race-notice label without close analysis of the statute. After careful consideration of the language and purpose of the statute, we are convinced that the better construction is as a pure notice statute.
Section 38-35-109, C.R.S. 1973, reads as follows:
"All deeds, powers of attorney, agreements, or other instruments in writing conveying, encumbering, or affecting the title to real property . . . may be recorded in the office of the county clerk and recorder of the county where such real property is situated and no such instrument or document shall be valid as against any class of persons with any kind of rights, except between the parties thereto and such as have notice thereof, until the same is deposited with such county clerk and recorder. In all cases where by law an instrument may be filed, the filing thereof with such county clerk and recorder shall be equivalent to the recording thereof."
The purpose of the statute is to "render titles to real property and every interest therein more secure and marketable." Section 38-34-101, C.R.S. 1973. Thus we must liberally construe the statute
"with the end in view of rendering such titles absolute and free from technical defects so that subsequent purchasers and encumbrancers by way of mortgage, judgment, or otherwise, may rely on the record title and so that the record title of the party in possession is sustained and not defeated by technical or strict constructions." Section 38-34-101, C.R.S. 1973. (emphasis added)
Moore v. Chalmers-Galloway Live Stock Co., 90 Colo. 548, 10 P.2d 950 (1932).
The statute reads like a pure notice statute, and the language is similar to pure notice statutes in other jurisdictions. 4 American Law of Property § 17.5 at 542-43 (1952); 1 R. Patton C. Patton, Land Titles § 9 (2d ed. 1957). For example, the Illinois recording act, which is generally considered as a notice statute, 4 American Law of Property, supra; 1 R. Patton C. Patton, Land Titles, supra, provides that:
"All deeds, mortgages and other instruments of writing which are authorized to be recorded, shall take effect and be in force from and after the time of filing the same for record, and not before, as to all creditors and subsequent purchasers, without notice; and all such deeds and title papers shall be adjudged void as to all such creditors and subsequent purchasers, without notice, until the same shall be filed for record." Ill. Rev. Stat. ch. 30, § 29 (Smith-Hurd, 1969).
Cf. Kovacevic v. City of Chicago, 7 Ill. Dec. 819, 47 Ill. App. 3d 674, 365 N.E.2d 104 (1977); Kahn v. Deerpark Investment Co., 115 Ill. App. 2d 121, 253 N.E.2d 121 (1969). See also Mass. Gen. Laws Ann. ch. 183, § 4 (West 1977). By contrast, language in race-notice statutes, such as Michigan's, specifies that the subsequent purchaser must first record before he can have priority:
"Every conveyance of real estate within the state hereafter made, which shall not be recorded as provided in this chapter, shall be void as against any subsequent purchaser in good faith and for a valuable consideration, of the same real estate or any portion thereof, whose conveyance shall be first duly recorded." Mich. Stat. Ann. § 26.547 (1970). (emphasis added)
Cf. Crouse v. Mitchell, 130 Mich. 347, 90 N.W. 32 (1902). Because § 38-35-109, C.R.S. 1973, does not specifically state that to assert priority a subsequent purchaser must record his interest, as well as acquire it without notice, we construe the statute liberally to protect those who take without notice of a prior unrecorded interest.
Our decision is buttressed by the fact that a pure notice statute serves to protect subsequent purchasers, allowing them to rely on the record title as it exists at the time of their purchase. The danger of a race-notice statute is that a prior interest holder who has failed to record may cut off the claim of a subsequent purchaser who relied on the record at the time of his closing but has not yet had time to record his own instrument. See Note, The Colorado Recording Act: Race-Notice or Pure Notice? 51 Den. L.J. 115 (1974). Characterizing the statute as a pure notice rather than race-notice statute will encourage purchasers to record their interests as soon as acquired. Although a subsequent purchaser need not record to protect his interest against prior unrecorded interests, unless he does record, his interest may be cut off by a purchaser subsequent to him.
Defendant contends that even if the statute is a pure notice statute, plaintiffs had constructive notice of the overriding royalty because it was recorded in the office of the Bureau of Land Management. We disagree.
[2] Recording in the office of the Bureau of Land Management is constructive notice only if so recognized by state law. Bolack v. Underwood, 340 F.2d 816 (10th Cir. 1965). There is nothing in the Colorado statutes which indicates any intent of the General Assembly that such federal records constitute constructive notice to a person acquiring an interest in property in Colorado. Because the purpose of § 38-35-109, C.R.S. 1973, is to strengthen record title by the recording in the County Clerk and Recorder's office, and because recording of a royalty interest with the Bureau of Land Management is only for the purpose of verifying the holdings of the assignee, 43 C.F.R. § 3106.4 (1977), we hold that recording with the Bureau of Land Management is not sufficient to constitute constructive notice of an interest in real property. Bolack v. Underwood, supra; Dame v. Mileski, 80 Wyo. 156, 340 P.2d 205 (1959).
Having determined that § 38-35-109, C.R.S. 1973, is a pure notice statute and that recording with the Bureau of Land Management is not constructive notice of an interest in real property, we find that plaintiffs acquired their interest in the oil and gas lease free of the unrecorded overriding royalty reserved by defendant.
The judgment is reversed and the cause is remanded with directions to enter judgment quieting title in plaintiffs to the 2% overriding royalty, and to order that all funds held in escrow pending this appeal be paid to plaintiffs.
JUDGE VAN CISE and JUDGE KELLY concur.