This was a suit in equity, brought in the circuit court of the United States for the eastern district of Illinois, by the holders of an oil and gas lease covering a small tract of land in Crawford county, Illinois, to enjoin operations under a later and similar lease, and to obtain a discovery and an accounting in respect of the oil and gas produced and sold in the course of operations already had. In due course the case was referred to a master, who took the evidence, reported the same with his conclusions upon questions of fact and law, and recommended a decree awarding the relief prayed, but taking no account of the gas theretofore used or sold. Exceptions to the report were filed by the defendants, and at the final hearing the circuit court overruled the exceptions, confirmed the report, and entered a decree as recommended. The decree was reversed by the circuit court of appeals with a direction that the bill be dismissed, the ground of decision being that the complainants were not entitled to relief in equity, and should be remitted to such remedy as they might have at law, because by the terms of their lease they had an option to surrender it at any time. 120 C. C. A. 436, 202 Fed. 106. Other questions in the suit were not considered by that court. The case is now here upon a writ of certiorari.
Both leases were for the same tract, and were given by James A. Smith, who owned it in fee simple. The earlier lease was given to one Walton, May 22, 1905, and by two successive assignments made in November and December following was transferred to Joseph F. Guffey and others, the complainants. It and the assignments were properly recorded June 15, 1906. The later lease was given to one Allison August 9, 1906, was assigned shortly thereafter to one Willett, and was transferred March 25, 1907, to Solley, Johnson, and Hennig, three of the defendants. There was also an intermediate lease to one Wilcox, given March 23, 1906, but as it was voluntarily surrendered and nothing is claimed thereunder, it suffices to say (a) that it contained a provision whereby the lessee therein agreed to protect the lessor against any expense or damage that might arise by reason of the earlier lease, (b) that before surrendering it Wilcox drilled a well upon the premises in an effort to find oil and gas, but without success, and (c) that the complainants, upon learning of this lease, promptly served upon Wilcox and the lessor a notice asserting the rights conferred by the prior lease.
Allison and his immediate assignee, Willett, took the subsequent lease with actual notice of the earlier one, and with constructive, if not actual, notice of its transfer to the complainants, but made no inquiry of the latter respecting its status or their claim under it. Nothing was done under the subsequent lease by Allison, but after its assignment to Willett the latter entered upon the premises, with the lessor's sanction, and drilled a well which yielded a flow of gas, but no oil. Upon learning of these drilling operations the complainants, in a written notice to Willett and the lessor, again asserted their claim under the prior lease, and demanded that the operations cease.
Solley and his associates took the assignment from Willett without actual knowledge of the prior lease, but, under the local law, were constructively charged with notice of it and of its transfer to the complainants, for both were duly recorded. They acted upon the advice of an abstractor who failed to make a proper examination of the records. After receiving the assignment, Solley and his associates, with the lessor's approval, proceeded to drill other wells upon the premises and developed the presence therein of oil in paying quantities. On August 1, 1907, they were actually and fully informed of the prior lease and of the complainants' purpose to insist upon the rights conferred by it and to obtain redress for the invasion of those rights, but they persisted in their drilling operations and produced and sold from the premises large quantities of oil. These operations were being continued when the suit was brought (March 24, 1908) and when the accounting was had before the master. Most of the oil taken from the premises was extracted and sold after August 1, 1907, the date when Solley and his associates were actually and fully informed of the complainants' claim.