No. 80-47

I N THE SUPREME COURT O T E STATE O M N A A

F H F OTN

1980 ED SKILLMAN,

P l a i n t i f f and A p p e l l a n t , THE DEPARTMENT O STATE LANDS O THE

F F STATE O MONTANA; THE BOARD O LAND

F F COMISSIONERS a n d JAMES R. FOSTER,

D e f e n d a n t s and R e s p o n d e n t s . Appeal from: The D i s t r i c t C o u r t o f t h e F i r s t J u d i c i a l D i s t r i c t ,

I n and f o r t h e County o f L e w i s and C l a r k , The

Honorable P e t e r G. Meloy, J u d g e p r e s i d i n g . Counsel o f Record:

For Appellant:

H a r r i s o n , Loendorf and P o s t o n , H e l e n a , Montana

For Respondents :

David Woodgerd, Department o f S t a t e Lands, H e l e n a ,

Montana

H. A. B o l l i n g e r , Bozeman, Montana

S u b m i t t e d on B r i e f s : J u n e 5 , 1980

Decided : J L 2 8 1980

U Mr. J u s t i c e John Conway H a r r i s o n d e l i v e r e d t h e Opinion of t h e Court.

Respondent Ed S k i l l m a n p e t i t i o n e d t h e D i s t r i c t C o u r t f o r j u d i c i a l r e v i e w of a d e c i s i o n by t h e S t a t e Board of Land Commissioners t o renew a l e a s e of s t a t e l a n d t o James R. Foster. The Board of Land Commissioners had renewed t h e l e a s e a f t e r f i n d i n g t h a t F o s t e r had a p r e f e r e n c e r i g h t . The D i s t r i c t C o u r t h e l d t h e Board of Land Commissioners e r r e d i n renewing t h e lease. The c o u r t remanded t h e c a s e t o t h e Board w i t h d i r e c t i o n s t o c a n c e l t h e F o s t e r l e a s e and lease t h e land without a preference r i g h t . The Department of S t a t e Lands and t h e S t a t e Board of Land Commissioners a p p e a l t h e d e c i s i o n of t h e D i s t r i c t C o u r t a s s e r t i n g t h e l e a s e t o F o s t e r s h o u l d be r e i n s t a t e d . S k i l l m a n c r o s s - a p p e a l s con- t e n d i n g t h e c o u r t s h o u l d have awarded t h e lease t o him r a t h e r t h a n o r d e r i n g t h e l e a s e reopened f o r b i d s .

The f a c t s i n t h i s c a s e a r e n o t d i s p u t e d by t h e p a r t i e s . F o s t e r h e l d a S t a t e of Montana s u r f a c e l e a s e t o 6 4 0 acres of g r a z i n g l a n d i n Park County, Montana. The l e a s e e x p i r e d on F e b r u a r y 28, 1979. On J a n u a r y 2, 1979, F o s t e r a p p l i e d t o renew h i s l e a s e on t h e l a n d a t a r a t e of $7.50 p e r AUM (animal-unit-month). On J a n u a r y 23, 1979, S k i l l m a n a p p l i e d t o lease t h e l a n d a t a r a t e of $18.75 p e r AUM. F o s t e r was n o t i f i e d of t h e b i d s u b m i t t e d by S k i l l m a n and informed t h a t a s c u r r e n t lessee he was e n t i t l e d t o e x e r c i s e a p r e f e r e n c e r i g h t t o meet t h e b i d . F o s t e r e x e r c i s e d t h e p r e f e r e n c e and m e t t h e b i d on F e b r u a r y 22, 1979. The l e a s e was renewed t o him on F e b r u a r y 28, 1979.

F o s t e r a l s o r e q u e s t e d and was g r a n t e d a h e a r i n g t o d e t e r m i n e whether t h e b i d was i n t h e b e s t i n t e r e s t o f t h e S t a t e of Montana. S t a t e Land Commissioner Leo B e r r y con- d u c t e d t h e h e a r i n g on t h e m a t t e r on March 27, 1979. Evi- dence i n t r o d u c e d a t t h e h e a r i n g showed t h a t F o s t e r had s u b l e a s e d t h e l a n d t o J i m S e r r a z z e n b u t had n o t f i l e d a s u b l e a s e form w i t h t h e Commissioners. Subsequent t o t h e h e a r i n g , Commissioner B e r r y recommended t h a t a renewal l e a s e be i s s u e d t o F o s t e r a t t h e r a t e of $7.50 p e r AUM. The Board a c c e p t e d t h e recommendation and renewed t h e l e a s e a t t h e $7.50 r a t e .

On J u l y 2 , 1979, t h e Department of S t a t e Lands c a n c e l e d F o s t e r ' s l e a s e f o r f a i l u r e t o f i l e a sublease. On c a n c e l - l a t i o n of t h e lease, i t was e x p l a i n e d t o F o s t e r t h a t h i s l e a s e would be renewed i f he p a i d a p e n a l t y of 50 p e r c e n t of t h e a n n u a l r e n t a l of t h e l a n d . F o s t e r p a i d t h e p e n a l t y , and the lease was reinstated.

The f o l l o w i n g i s s u e i s r a i s e d by t h e Department of S t a t e Lands f o r review:

Did t h e D i s t r i c t C o u r t err i n d e t e r m i n i n g F o s t e r s h o u l d n o t be g r a n t e d a p r e f e r e n t i a l r i g h t t o l e a s e t h e l a n d i n q u e s t i o n under t h e a u t h o r i t y of J e r k e v . S t a t e Department of Lands ( 1 9 7 9 ) , Mont. , 597 P.2d 49, 36 St.Rep. 389?

Respondent S k i l l m a n r a i s e s t h e f o l l o w i n g i s s u e on cross-appeal:

Did t h e D i s t r i c t C o u r t err i n d e c l a r i n g t h e l a n d i n q u e s t i o n s h o u l d be reopened f o r p u b l i c b i d r a t h e r t h a n awarding t h e lease t o S k i l l m a n ?

The arguments of t h e S t a t e a r e n o t p e r s u a s i v e i n t h i s case. Although t h e S t a t e i s c o r r e c t i n s t a t i n g t h a t J e r k e i s l i m i t e d t o i t s f a c t s , t h e d i s t i n c t i o n s made by t h e S t a t e a r e not f a t a l t o i t s application here. A s Chief ~ u s t i c e Haswell p o i n t e d o u t i n J e r k e , t h e c r u c i a l p o i n t of t h e case is this:

"To a l l o w a n e x i s t i n g lessee who d o e s n o t u s e

t h e land t o exercise a preference r i g h t consti-

t u t e s a n u n c o n s t i t u t i o n a l a p p l i c a t i o n of t h e

preference r i g h t s t a t u t e , s e c t i o n 81-405(1),

R.C.M. 1947, now s e c t i o n 77-6-205 (1) MCA." ,

597 P.2d a t 51, 36 St.Rep. a t 392.

The m e r e f a c t t h a t t h e l e s s e e i n t h i s c a s e i s a n i n d i - v i d u a l i n s t e a d of a g r a z i n g d i s t r i c t i s n o t s u f f i c i e n t l y m a t e r i a l t o t h e p o l i c y involved t o disallow t h e a p p l i c a t i o n of t h e p r e c e d e n t .

F u r t h e r , i f t h e c a s e i s d i s t i n g u i s h a b l e and J e r k e s h o u l d n 6 t be c o n t r o l l i n g a s p r e c e d e n t , t h e r e i s even more j u s t i f i c a t i o n f o r a p p l y i n g t h e r a t i o n a l e of J e r k e h e r e . In J e r k e , a l t h o u g h t h e r e was a s u b l e a s e i n v o l v e d , t h e r e i s no e v i d e n c e t h a t t h e r e was a n i l l e g a l s u b l e a s e , as i n t h e c a s e before us. Here t h e l e s s e e , F o s t e r , s u b l e t h i s g r a z i n g l e a s e w i t h o u t h a v i n g t h e s u b l e a s e approved by t h e Department of S t a t e Lands a s r e q u i r e d by h i s lease w i t h t h e S t a t e . S e c t i o n 77-6-205(1), MCA, r e c i t e s i n a p p l i c a b l e p a r t :

" ( 1 ) A l e s s e e of s t a t e l a n d c l a s s e d a s a g r i -

c u l t u r a l , g r a z i n g , town l o t o r c i t y l o t who h a s

p a i d a l l t h e r e n t a l s due from him t o t h e s t a t e

and - - n o t v i o l a t e d - t e r m s - -s lease

who h a s - the of h i -

i s e n t i t l e d t o have h i s l e a s e renewed . . ."

(Emphasis s u p p l i e d . )

F u r t h e r , ARM §26.3.108(2) e s t a b l i s h e s t h e D e p a r t m e n t ' s policy:

" ( 2 ) A s u r f a c e lessee h a s a p r e f e r e n c e r i g h t

t o renew h i s l e a s e p r o v i d e d a l l r e n t a l s have

been p a i d and t h e t e r m s - -e p r e v i o u s l e a s e

of t h

--- v i o l a t e d . " (Emphasis s u p p l i e d . )

have n o t been

A s t r i c t r e a d i n g of t h e s e s t a t u t e s r a i s e s a s e r i o u s q u e s t i o n whether F o s t e r even had a r i g h t t o renew ( s e c t i o n 77-6-205, MCA) o r a p r e f e r e n t i a l r i g h t i n t h e l e a s i n g pro- c e d u r e (ARM § 2 6 . 3 . 1 0 8 ( 2 ) ) , when t h i s c a s e was f i l e d i n D i s t r i c t Court. Assuming h i s s u b l e a s e a r r a n g e m e n t , a l t h o u g h n o t approved by t h e Department, w a s n o t s u f f i c i e n t t o d e p r i v e him of h i s p r e f e r e n c e r i g h t , he would c l e a r l y be t h e t y p e of lessee t h a t t h e p o l i c y of J e r k e was d e s i g n e d t o a f f e c t .

I n c o n s i d e r a t i o n of o u r r e a s o n i n g i n J e r k e , w e a r e compelled t o a p p l y t h e same r e a s o n i n g t o t h e c a s e b e f o r e u s . I n Jerke, w e held:

"Where t h e p r e f e r e n c e r i g h t d o e s n o t f u r t h e r

t h e p o l i c y of s u s t a i n e d y i e l d , i t c a n n o t be

given e f f e c t . I n s u c h a s i t u a t i o n , f u l l market

v a l u e can be o b t a i n e d o n l y by p u r e c o m p e t i t i v e

b i d d i n g . Here, t h e Grazing D i s t r i c t , t h e

h o l d e r of t h e p r e f e r e n c e r i g h t , d o e s n o t even

u s e t h e l a n d ; i t c a n n o t u s e good a g r i c u l t u r a l

p r a c t i c e s o r make improvements t h e r e o n . ..

"To a l l o w t h e p r e f e r e n c e r i g h t t o be e x e r c i s e d

i n t h i s c a s e would be t o i n s t a l l t h e Grazing

D i s t r i c t a s t h e t r u s t e e of t h e l a n d . It,

r a t h e r t h a n t h e Department of S t a t e Lands,

would d e c i d e who w i l l occupy t h e l a n d , b u t i t

would n o t be bound by a c o n s t i t u t i o n a l o r f i d u -

c i a r y d u t y . Under such a scheme, t h e c o n c e p t

of s u s t a i n e d y i e l d would have no p l a c e . " 597

P.2d a t 51, 36 St.Rep. a t 391.

There a p p e a r s t o be no o p e r a t i v e f a c t on t h e r e c o r d h e r e t h a t would j u s t i f y o v e r r u l i n g t h e t r i a l c o u r t ' s d e c i - sion t o follow Jerke. Every p o i n t o f law and e v e r y p o l i c y c o n s i d e r a t i o n i s a s a p p l i c a b l e t o F o s t e r a s i t was t o t h e grazing d i s t r i c t . Therefore, the underlying r a t i o n a l e t h a t o r i g i n a l l y d e c i d e d J e r k e i s e q u a l l y d i s p o s i t i v e of t h i s case.

On c r o s s - a p p e a l S k i l l m a n c o n t e n d s t h a t h e s h o u l d be awarded t h e l e a s e b e c a u s e h e was t h e h i g h e s t b i d d e r when b i d s w e r e o r i g i n a l l y opened. H e i n t e r p r e t s t h e l a n g u a g e of J e r k e and s e c t i o n 77-6-205(2), MCA, r e l a t i n g t o " p u r e com- p e t i t i v e b i d d i n g " a s meaning b i d d i n g once and a s u b s e q u e n t award t o t h e h i g h e s t b i d d e r .

I t would be t r u l y i n e q u i t a b l e t o f o l l o w t h i s i n t e r p r e - tation. F o s t e r was under t h e i m p r e s s i o n t h a t he would have a v a l i d p r e f e r e n c e r i g h t , and he s h o u l d n o t b e p e n a l i z e d f o r t h a t good f a i t h b e l i e f . He should have a n e q u a l o p p o r t u n i t y t o b i d on t h e l e a s e . I n d e e d , i f he i s n o t a l l o w e d t o p a r t i - c i p a t e , t h e n t h e s p i r i t of t h e c o m p e t i t i v e b i d d i n g s t a t u t e would be d e f e a t e d . I n a d d i t i o n , F o s t e r had no r e a s o n t o s u s p e c t t h a t he c o u l d n o t e x e r c i s e t h e p r e f e r e n c e r i g h t s i n c e J e r k e had n o t been d e c i d e d by t h i s C o u r t .

The judgment of t h e D i s t r i c t C o u r t i s a f f i r m e d . The l e a s e i s c a n c e l e d and reopened f o r b i d d i n g by a l l p a r t i e s . W concur: e 3 4

Chief J u s t i c e

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