Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Kern County Super. Ct. No. S-1500-CV-256430. Sidney P. Chapin and Arthur E. Wallace, Judges.
Judge Chapin signed the Order Granting Harris’s Motion for Summary Adjudication and denying Defendant’s Motion for Summary Adjudication. Judge Wallace signed the Judgment.
LeBeau-Thelen and J. Nile Kinney for Defendant and Appellant.
Jeffery D. Trowbridge for Plaintiff and Respondent.
OPINION
Gomes, J.
In 1973, a petroleum company entered into a lease allowing it to discover and produce oil and gas on two sections of land located in Kern County. In 1975, the petroleum company assigned Charlotte S. Harris and her husband, Walter Harris, a three percent overriding royalty interest in any oil and gas the company might produce under that lease. After Walter Harris’s death in 1981, plaintiff and cross-defendant Charlotte S. Harris, as Trustee of the Harris Family Trust (Harris), succeeded to his interest in the assignment and received payments of the overriding royalty interest. In 1997, defendant and cross-complainant 25 Hill Properties, Inc. (25 Hill) obtained title to a portion of the land covered by the oil and gas lease, and in 2000, 25 Hill was assigned the lessee’s interest in the oil and gas lease, which granted it the right to continue oil and gas production. 25 Hill thereafter continued to pay Harris the overriding royalty interest.
In November 2002, 25 Hill deeded its property to another entity, EK Trust, changed its ownership, and continued to produce oil and gas on the property covered by the oil and gas lease. In June 2005, 25 Hill stopped paying Harris the overriding royalty interest, asserting it was no longer obligated to do so because a merger had occurred in June 2000 which extinguished the oil and gas lease, as well as the overriding royalty interest. Harris sued, claiming 25 Hill had a continuing obligation to pay the overriding royalty interest, and 25 Hill filed a cross-complaint for restitution of the overriding royalty interest it paid from June 2000 to June 2005. On cross-motions for summary adjudication, the trial court held that no merger occurred, but even if the conditions for merger were created, a merger would not extinguish Harris’s overriding royalty interest because to do so would be inequitable. Consequently, the court found 25 Hill remained obligated to pay the overriding royalty interest to Harris. 25 Hill appeals from the resulting judgment. As we shall explain, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
The 1973 Lease
In November 1973, Overland Petroleum Company (Overland), as lessee, and four trustees of a trust created by the will of Ida May Jameson (the Jameson Trust), as lessor, entered into an “Oil, Gas and Mineral Lease” (the 1973 Lease). The 1973 Lease gave Overland the right to perform drilling operations for oil, gas and other hydrocarbons on land the Jameson Trust owned. The land covered by the 1973 Lease is located in Kern County and is described in the lease as Section 24 of Township 32 South, Range 23 East, MDB&M to a depth of 3,000 feet below ground surface (Section 24) and Section 2 of Township 11 North, Range 24 West, SBB&M, located in Kern County (Section 2) (collectively the Property).
The 1973 Lease requires Overland to commence drilling operations on the Property within 90 days of the lease and to pay the Jameson Trust royalties consisting of a $400,000 total guaranteed minimum royalty followed by a royalty of one-sixth of the oil, gas and other substances produced, saved and sold under the 1973 Lease’s terms and provisions. The 1973 Lease further provides, in pertinent part, that: (1) if the Jameson Trust owns less than the whole of the oil and gas rights in the land, the royalties accruing under the lease shall be proportionally reduced; (2) Overland may at any time quitclaim and surrender all of the leased land, thereby ending the lease, or quitclaim and surrender any portion of the leased land, which would cause the rental provided for in the lease to accrue only on the basis of the land not so quitclaimed; and (3) if the lease is assigned as to particular parts of the leased land, such division shall constitute and create separate and distinct holdings under the lease, and the holder or owner of each portion of the leased land shall be required to comply with and perform the lessee’s obligations under the lease only to the extent of his portion of the leased land. The term of the 1973 Lease was for 20 years, but would continue thereafter so long as development or production operations continued.
The Assignment of an Overriding Royalty Interest to Harris
In March 1975, Overland assigned to Walter S. Harris, a consulting petroleum geologist, and his wife, Charlotte S. Harris, a three percent overriding royalty interest (ORRI) in Overland’s interest in the 1973 Lease, in a document entitled “Assignment of Overriding Royalty” (the Harris Assignment). The Harris Assignment was recorded in the official records on April 8, 1975, giving actual and constructive notice of such real property interest.
According to Charlotte Harris, her husband was the geologist who originally worked out the prospect that resulted in the production of oil in economic quantities from Section 24 and the Harris Assignment was given in consideration of his services. Rodney Nahama, 25 Hill’s geologist since 2003, however, stated in a declaration that he reviewed 25 Hill’s geological files and could not find any geologic analysis Mr. Harris performed that would support a conclusion his work led to oil production from the property in payable quantities. Nevertheless, 25 Hill does not dispute that the ORRI was supported by consideration given by Mr. Harris.
The Harris Assignment states that Overland owns certain interests in the 1973 Lease covering Section 24 and provides for payment of an ORRI equal to three percent of all “oil, gas and other hydrocarbons which may be produced, saved and sold” from Section 24 pursuant to the terms and conditions of the 1973 Lease. The Harris Assignment further provides, in pertinent part: (1) if the 1973 Lease “covers less than the entire fee simple estate in and to the oil and gas and other hydrocarbons which may be in, on or producible from [Section 24],” then the ORRI assigned to Harris “shall be reduced in the proportion that the interest covered by the [1973] Lease bears to the full and undivided fee simple estate in and to said oil, gas and other hydrocarbons”; (2) the ORRI assigned to Harris “shall not imply any duty or any leasehold preservation or create any drilling or development obligations on the part of [Overland] in any manner whatsoever”; (3) if Overland “should acquire a new lease on all or any part of [Section 24] on which the existing lease is terminated, released, relinquished or surrendered,” within six months from the date of such termination, release, relinquishment or surrender, then Overland “shall execute and deliver to [Harris] an assignment of an overriding royalty equal to three percent (3%) of all oil, gas and other hydrocarbons which may be produced, saved and sold from [Section 24] pursuant to the terms and conditions of said new lease,” and the assignment “shall be subject to all of the other terms, conditions and provisions of this Assignment, including specifically the proportionate reduction clause”; and (4) its terms, provisions and covenants are to be binding upon all successors and assigns of the parties and such terms, provisions and covenants “shall be deemed to be covenants running with [Section 24], [the 1973] Lease and the leasehold estate created thereby.”
Walter Harris died in June 1981, and Harris succeeded to his interest in the Harris Assignment in October 1983. Over a 30 year period from March 1975 to June 2005, 25 Hill and its predecessors in interest, or their designees, paid the ORRI to the Harrises and their successors.
25 Hill Obtains Title to a Portion of Section 24
On July 8, 1997, 25 Hill acquired fee title to all surface rights, mineral interests and the lessors’ royalty interests in and to the south one-half and a small portion of the north one-half of Section 24 of Township 32 South, Range 23 East, MDB&M, to a depth of 3,000 feet below ground. In response to an August 31, 1998 letter to Harris from 25 Hill, which informed Harris it had acquired the 1973 Lease, which it referred to as the “Jameson Trust Lease - Taft,” and asked for proof of Harris’s royalty interest in the lease, Harris provided such proof. Thereafter, 25 Hill continued making timely, monthly royalty payments to the Harris Family Trust, which were accompanied by statements which referenced the 1973 Lease as the Jameson Trust - Taft and provided information as to the quantity of oil produced under such lease, its price and the calculation of the three percent ORRI due the Harris Family Trust.
25 Hill is Assigned The Lessee’s Interest in the 1973 Lease
On June 22, 2000, 25 Hill acquired all right, title and interest in and to a number of oil and gas leases, including the 1973 Lease, by a written assignment. The assignment states that 25 Hill agrees the “Assignment is expressly made subject to all the terms of the Leases, and all contracts, agreements, instruments and documents affecting the Leases and Wells, including existing royalties, and any other burdens on production.” 25 Hill had notice of Harris’s ORRI when it acquired the 1973 Lease. After 25 Hill acquired the lessee’s interest in the 1973 Lease, it did not pay to any person or entity the lessor’s royalty of one-sixth (or 16.66 %) of the oil, gas or other substances produced, although it continued to pay ORRIs totaling 8.33% of production to Harris and another entity, with Harris receiving three percent and the other entity 5.33 percent.
25 Hill Deeds the Property and Assigns an ORRI to EK Trust
On November 27, 2002, 25 Hill deeded the portion of Section 24 it acquired in 1997 to Ron Engelberg and Keren Engelberg, trustees of the EK Trust. On December 16, 2002, the ownership of 25 Hill changed when Ron Engelberg, Keren Engelberg, Maya Engelberg and Danna Engelberg (the Engelbergs) purchased all of 25 Hill’s outstanding stock from its current owners, Charles Beard and John Ashcraft. Ron Engelberg became 25 Hill’s president and the Engelbergs’s father, Bet Engelberg, became 25 Hill’s general manager. 25 Hill continued in the role of producer/operator of Section 24. It was reported in a December 20, 2002 oil inventory at sale of the corporation that 25 Hill held a 91.66 % interest in the 1973 Lease after royalties.
On December 18, 2002, EK Trust and the new owners of 25 Hill executed an “Assignment of Overriding Royalty and Bill of Sale,” which specifically states that 25 Hill assigns to EK Trust a 1/12 of 100%, or 8.33 %, interest in the 1973 Lease and that the 1973 Lease covers Section 24 and Section 2.
25 Hill Stops Paying ORRI to Harris
In 2004, a title dispute arose when Bet Engelberg discovered 25 Hill was not the record owner of the mineral lessor’s right to most of the north half of Section 24. 25 Hill retained an attorney to assist in resolving the title dispute. That attorney wrote a letter in March 2004 to the prior owners of 25 Hill, to which was attached a letter written by Gene McFarland, a landman. After discussing the title dispute, McFarland stated in his letter that the “biggest concern will be about the overriding royalty reserved under the old leases. I am not an attorney, but, it would seem to me they should probably be honored.” On September 29, 2004, 25 Hill’s attorney wrote the attorney for the prior owners, in which he expressed his belief that overriding royalty interests still existed.
When the parties were unable to resolve the title dispute, 25 Hill retained the law firm of LeBeau-Thelen, LLP, who filed lawsuits on 25 Hill’s behalf over the title dispute. In May 2005, Bet Engelberg asked an attorney with LeBeau-Thelen to review the status of title to the mineral and surface interests in the portion of Section 24 which was not involved in the title dispute. On June 16, 2005, that attorney advised Bet Engelberg that 25 Hill’s acquisition of the 1973 Lease on June 22, 2000, combined with its acquisition of the fee title to a portion of Section 24 on July 8, 1997, resulted in a legal merger of 25 Hill’s interests in the property, which extinguished all ORRIs. Bet Engelberg and the Engelbergs claim that before this opinion was offered, they did not know that 25 Hill’s ownership of all such interests had the effect of extinguishing all ORRIs.
On June 21, 2005, 25 Hill informed Harris by letter that it would no longer pay Harris any ORRI attributable to the 1973 Lease. 25 Hill explained that it had been advised that the 1973 Lease had been terminated when 25 Hill owned both the lessor’s and lessee’s interests in it, which in turn terminated the ORRI. 25 Hill instructed its disbursing agent to cease paying the ORRI from the 1973 Lease to Harris and the other ORRI owner as of June 21, 2005, and to add all unpaid balances and future payments to EK Trust’s royalty, making the total royalty payment to EK Trust “the full 16.66%.” In a June 27, 2005 letter to 25 Hill, Harris’s attorney disputed 25 Hill’s contentions and demanded continued payment of the ORRI. In a July 28, 2005 letter to 25 Hill, 25 Hill’s disbursing agent recognized the 1973 Lease was subject to ORRI of 8.33% and confirmed future payments on that lease to EK Trust would increase from 8.33% to 16.66%. From June 2005 through March 2006, 25 Hill’s disbursing agent sent Harris accountings of the oil continuing to be produced under the 1973 Lease.
This Lawsuit
On December 27, 2005, Harris filed a first amended complaint against 25 Hill, alleging causes of action for (1) breach of the Harris assignment based on 25 Hill’s failure to pay the ORRI since July 2005; (2) fraud and unjust enrichment; (3) slander of title; (4) accounting; and (5) declaratory relief. 25 Hill filed an answer to the complaint, asserting as its second affirmative defense that Harris’s rights, if any, to the ORRI on the portion of Section 24 that 25 Hill had owned were extinguished as a result of the merger of all interests in and to the minerals in the land on June 22, 2000, and in its third affirmative defense that if Harris was entitled to payment of an ORRI on the hydrocarbons produced from the north one-half of Section 24, 25 Hill was entitled to offset against the full amount of ORRI mistakenly paid to Harris from June 2000 to June 2005. 25 Hill also filed a cross-complaint, asserting causes of action for restitution and money had and received, in which it alleged its obligation to pay Harris the ORRI for production from the portion of Section 24 that 25 Hill had owned ceased on June 22, 2000, that 25 Hill continued to pay the ORRI based on production from all of Section 24 because it mistakenly believed Harris’s ORRI continued to exist, and when it realized its mistake, 25 Hill offered to waive its right to restitution of the amounts paid if Harris would waive her alleged interest in continued ORRI allocable to the north one-half of Section 24, which Harris rejected. By its cross-complaint, 25 Hill sought restitution for the ORRI it paid Harris.
The Summary Adjudication Motions
On July 3, 2006, Harris filed a motion for summary adjudication as to (1) 25 Hill’s second affirmative defense of merger; (2) 25 Hill’s third affirmative defense of offset; (3) 25 Hill’s cross-complaint for restitution and money had and received; and (4) Harris’s first cause of action for breach of the Harris Assignment. Harris argued that 25 Hill’s defense of merger was without merit because (1) no merger of interests ever occurred, (2) the language of the Harris Assignment prohibited 25 Hill from taking action which would unjustly enrich it at Harris’s expense, and (3) a court of equity will not find a merger where an intervening estate or rights of innocent third parties will be defeated.
On July 28, 2006, 25 Hill filed its own motion for summary adjudication as to all of the causes of action alleged in Harris’s complaint, asserting that none of them could be established because the ORRI at issue was extinguished as a matter of law and no reasonable trier of fact could conclude 25 Hill acquired its interest in Section 24 for the purpose of committing fraud or inequity. 25 Hill asserted the motion presented a pure question of law on undisputed facts, i.e. whether an ORRI in the 1973 Lease still existed on the Property. 25 Hill argued it did not because the 1973 Lease was merged with the fee title to a portion of Section 24 when 25 Hill acquired concurrent ownership of both estates on June 22, 2000, with the result that both the 1973 Lease and the ORRI associated with it were extinguished. 25 Hill further argued that since it was unaware a merger had occurred in 2000 which extinguished the ORRI, it could not have committed fraud or unjust enrichment. 25 Hill explained it was not claiming a merger or extinguishment of Harris’s ORRI on the north one-half of Section 24 and was seeking adjudication in its favor only as to the portion of Section 24 it acquired in 1997.
Following oral argument on the motion, at which the parties conceded there was no contested issue of material fact and the issue could be decided as a matter of law, the trial court took the matter under submission. The trial court thereafter issued a minute order granting Harris’s motion for summary adjudication in its entirety. The trial court explained that the parties agreed the two motions presented a question of law, namely whether 25 Hill’s acquisition of the 1973 Lease in 2000, coupled with its acquisition in 1997 of a partial interest in the Property subject to the 1973 Lease, effected a merger that extinguished Harris’s three percent ORRI, and Harris was correct in asserting that it did not. The trial court based its conclusion on the following findings: (1) no merger occurred because 25 Hill did not possess the entirety of the greater and lesser estates, i.e. all the interests in the real property, when it acquired the 1973 Lease in 2000 after acquiring a partial interest in the Property to which the 1973 Lease was subject; and (2) even if a merger occurred, it still would not have extinguished Harris’s ORRI because the result would be inequitable, as 25 Hill expressed its intention to honor Harris’s ORRI by specifically acquiring the 1973 Lease subject to all agreements, instruments and documents affecting the lease, including existing royalties. In its formal written order, the trial court further found that Harris was entitled to a declaration, in accord with the fifth cause of action for declaratory relief, consistent with these findings.
The court reserved for trial the issues of the amount of Harris’s damages, to be determined under Harris’s fourth cause of action for accounting, and whether Harris is entitled to judgment under the second cause of action for fraud/unjust enrichment and third cause of action for slander of title. After this ruling, Harris dismissed the second and third causes of action in the first amended complaint with prejudice.
Judgment was entered in accordance with the trial court’s ruling which declared that Harris’s ORRI continues in full force and effect and 25 Hill, as successor to the lessee’s interest under the 1973 Lease, remains obligated to pay the ORRI to Harris from November 1, 2006 forward, found in favor of Harris and against 25 Hill on 25 Hill’s cross-complaint, entered judgment in Harris’s favor for past due royalty payments from June 2005 through October 2006, plus interest, totaling $27,792.39, and awarded Harris her costs.
DISCUSSION
I. Standard of Review
25 Hill argues the court erred in granting Harris’s motion for summary adjudication and denying its own motion. We review an order granting summary adjudication under the same standard as an order granting summary judgment. (Lindstrom v. Hertz Corp. (2000) 81 Cal.App.4th 644, 648.) Our review is de novo. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 860 (Aguilar).) We independently review the record and apply the same rules and standards as the trial court. (Zavala v. Arce (1997) 58 Cal.App.4th 915, 925.) The trial court must grant the motion if “all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” (Code Civ. Proc., § 437c, subd. (c).) “There is a triable issue of fact if, and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof.” (Aguilar, 25 Cal.4th at p. 850, fn. omitted.)
When conducting its independent review, an appellate court considers “all the evidence set forth in the moving and opposition papers except that to which objections were made and sustained.” (Johnson v. City of Loma Linda (2000) 24 Cal.4th 61, 65-66.) In addition, the appellate court must consider all inferences reasonably drawn from that evidence. (Aguilar, supra, 25 Cal.4th at p. 843.) The admissible evidence and the reasonable inferences are viewed in the light most favorable to the party opposing the motion. (Ibid.)
II. Merger
The doctrine of merger provides that whenever the same person holds a greater and lesser estate in the same parcel of real property, without an intermediate interest or estate, the lesser estate generally merges into the greater and is extinguished. (Sheldon v. La Brea Materials Co. (1932) 216 Cal. 686, 689-690 (Sheldon); Kolodge v. Boyd (2001) 88 Cal.App.4th 349, 361 (Kolodge); 4 Miller & Starr, Cal. Real Estate (3d ed. 2000) § 10:41, p. 130.) Thus, under some circumstances a lessee’s estate can merge with the lessor’s estate when the same person holds both estates. (Summit Industrial Equipment, Inc. v. Koll/Wells Bay Area (1986) 186 Cal.App.3d 309, 316, overruled on others grounds by Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362; Erving v. Jas. H. Goodman & Co. Bank (1915) 171 Cal. 559, 563.)
A merger, however, “does not always follow the union of a greater and lesser estate in the same ownership.” (Ito v. Schiller (1931) 213 Cal. 632, 635-636 (Ito).) Whether there has been a merger depends on the equities and the intent of the parties. (Kolodge, supra, 88 Cal.App.4th at p. 362.) “It is well established that equity will interpose to prevent a merger where from the circumstances it is apparent that it was not the intention of the grantee that a merger should take place; and where it appears to be for the interest of the grantee that there should be no merger of the lesser estate, such will be presumed to have been his intention.” (Sheldon, supra, 216 Cal. at p. 691.) Thus, in the absence of an expression of a contrary intent, the doctrine of merger is applied only where it prevents an injustice and serves the interests of the person holding the two estates. (Ibid.; Ito, supra, 213 Cal. at p. 635.) “‘ .…[I]f the interest of the person in whom the several estates have united, as shown from all the circumstances, would be best subserved by keeping them separate, the intent so to do will ordinarily be implied.’” (Ito, supra, 213 Cal. at pp. 635-636.)
25 Hill asserts that a partial merger occurred in June 2000 when it held concurrent ownership of the fee title and lessor’s interest under the 1973 Lease to a portion of Section 24, and the lessee’s interest in the 1973 Lease, which extinguished the 1973 Lease and the Harris Assignment to the extent they applied to the portion of Section 24 that 25 Hill owned. There is no direct evidence, however, of an express intent that a merger occur. This leaves the question of whether we may presume it was 25 Hill’s intention that a merger occur. Although it may have been in 25 Hill’s interests to have a merger occur, as it arguably would extinguish at least part of the ORRI, the circumstances of 25 Hill’s acquisition of the lessee’s interest in the 1973 Lease in June 2000, and its subsequent conduct, evidences an intent that no merger occur. As Harris points out, 25 Hill expressly agreed when the 1973 Lease was assigned to it that the assignment was subject to all contracts affecting the lease, including existing royalties, and continued to pay Harris the three percent ORRI. After title to the portion of Section 24 that 25 Hill acquired in 1997 was transferred to EK Trust and 25 Hill’s ownership changed, 25 Hill, as lessee under the 1973 Lease, assigned an ORRI in that lease to EK Trust on the entire leasehold estate, including the portion of Section 24 that 25 Hill had owned. From this evidence, it could be inferred that 25 Hill did not intend that a merger occur when it concurrently held title to a portion of Section 24 and the lessee’s interest in the 1973 Lease.
Harris contends a merger could not have occurred because 25 Hill did not own all of the interests in the portion of Section 24 to which it held title, as 25 Hill never acquired the Harris Assignment. In support of this assertion, Harris cites a treatise on oil and gas law, which states that “[i]f a lessee acquires title to the leased land or the reversionary interest in the oil and gas, an outstanding royalty interest reserved in the lease is not destroyed by the principle of merger.” (3A Summers, The Law of Oil and Gas (1958) § 601, pp. 307, 309.) The Summers treatise derived this statement from the case of Badger Oil Co. v. Commissioner of Internal Revenue (5th Cir. 1941) 118 F.2d 791, 792, in which the court held an oil and gas lease was not extinguished by merger when the lessee acquired all interests in the land except an outstanding one-third of the lessor’s one-eighth royalty interest, which under Texas law gave them title to fractional interests in the minerals in place. As 25 Hill points out, the California Supreme Court has held that while overriding royalty interests created by an operating lessee for the duration of a specific oil and gas lease are interests in real property, they are determinable interests limited to the duration of the existing lease and therefore termination of the oil and gas lease would result in termination of the interests created under it. (La Laguna Ranch Co. v. Dodge (1941) 18 Cal.2d 132, 135, 140.) Based on this authority, 25 Hill asserts that the ORRI at issue here is not the equivalent of a title to fractional interests, as in Badger Oil Co., or an intervening estate that would prevent a merger.
We need not decide, however, whether a partial merger actually occurred because even if it did, we would not apply the doctrine here. It is a fundamental principle that “‘[t]he doctrine of merger is to be applied in a manner calculated to prevent injustice, injury and prejudice to the rights of innocent third persons [such that] it has been held that the doctrine [will] not be applied to extinguish a leasehold estate when the lessee acquire[s] the fee, when the application of the doctrine would [prejudice] the rights of an innocent third party.’” (6424 Corporation v. Commercial Exchange Property, Ltd. (1985) 171 Cal.App.3d 1221, 1223-1224 (6424 Corporation).)
In that case, real property was subject to a ground lease. The leasehold was subject to three purchase money encumbrances, secured by first, second and third trust deeds in favor of three different entities. In 1980, the Kures became concurrent owners of the fee and the leasehold when they purchased both the lessee’s interest in the lease and the fee interest in the property. The Kures then entered into an agreement with the holder of the third trust deed to modify the payment terms of the promissory note, which expressly acknowledged the lease’s existence. In 1982, the Kures conveyed their interests in the property by grant deed to a company. In 1983, through a series of subsequent transactions, the plaintiff obtained the trust deed to the property. The plaintiff sued the holders of the three trust deeds to cancel the instruments, asserting the leasehold had merged with the fee when the Kures acquired concurrent ownership of both estates, which extinguished the liens associated with the three trust deeds. (6424 Corporation, supra, 171 Cal.App.3d at pp. 1222-1223.)
The appellate court affirmed the trial court’s grant of the summary judgment motion brought by the holders of the three trust deeds, which asserted that no merger occurred that rendered the trust deeds invalid. (6424 Corporation, supra, 171 Cal.App.3d at p. 1223.) While the court recognized the parties had made various arguments for affirmance and reversal, in its view the matter was disposed of by a fundamental principle that required little discussion, namely the principle that the doctrine of merger will not be applied to extinguish a leasehold estate when the lessee acquires the fee if to do so would prejudice the rights of an innocent third party. (Id. at pp. 1223-1224.) The court explained, “[i]n contravention of this well founded and manifestly equitable proposition, what is sought to be established by appellant is no more nor less than that, based solely upon the circumstances of the fee and leasehold estates having been placed in the ownership of the Kures, the otherwise legitimate interests of respondents, acknowledged and accepted as valid by the Kures …, should be found to have disappeared, through application of the rule which in all events ‘arose out of the fondness of the law for convenience and symmetry, [but which] was never designed to defeat the rights of a third party, which had intervened before the merger took effect.’” (Id. at p. 1224.)
25 Hill contends 6424 Corporation is inapplicable here because the trust deeds at issue there were intermediate vested estates, whereas the ORRI at issue here is not an intervening estate affecting merger. Even if this distinction is accurate, however, we do not believe that renders the principles discussed in 6424 Corporation inapplicable to Harris, as the court’s emphasis in 6424 Corporation was not on the characterization of the interests held by the respondents, but on whether application of the doctrine of merger would prejudice or defeat their rights.
Here, through the Harris Assignment, Harris had an expectation of receiving a three percent ORRI on the oil, gas and other hydrocarbons that Overland or its successors in interest produced from Section 24 pursuant to the terms and conditions of the 1973 Lease. When 25 Hill was assigned the lessee’s interest in the 1973 Lease after having acquired title to a portion of Section 24, it specifically agreed that the assignment was subject to all contracts affecting the 1973 Lease, including existing royalties. Thereafter, 25 Hill continued production operations and paid Harris the three percent ORRI. By agreeing that the assignment was subject to existing royalties and continuing to pay the ORRI to Harris, 25 Hill dealt with Harris in such a manner as to indicate an intention that the 1973 Lease and the fee in a portion of Section 24 should not merge. Moreover, after 25 Hill divested itself of a portion of Section 24 and its ownership changed, 25 Hill continued to pay Harris the ORRI, and even used the 1973 Lease as a basis for paying EK Trust an 8.33% ORRI, thereby evidencing the continued existence of the 1973 Lease in its entirety.
25 Hill asserts we are precluded from finding as a matter of law that a merger would prejudice Harris’s rights because there is an issue of fact as to whether 25 Hill actually intended a merger to occur. 25 Hill argues a trier of fact could conclude that no merger was intended from the evidence that (1) it did not pay the lessor’s royalty after June 2000; (2) the December 20, 2002 oil inventory the prior owners of 25 Hill provided to the Engelbergs shows that 25 Hill owned at least a 91.66% interest in the 1973 Lease; and (3) 25 Hill only continued to pay the ORRI because it did not know its legal rights, i.e. that a partial merger occurred when 25 Hill owned fee title to a portion of Section 24 and the lessee’s interest in the 1973. In assessing the issue of prejudice to Harris’s rights, however, the question is not what 25 Hill actually intended, but whether a merger should be applied when it would prejudice the rights of an innocent third party. (6452 Corporation, supra, 171 Cal.App.3d at pp. 1223-1224.) Even if 25 Hill actually intended that a merger should take place, we would not sanction that result because it would unjustly injure the rights of Harris, who must be held to be an innocent third person.
25 Hill also argues extinguishment of the ORRI on the portion of Section 24 that 25 Hill owned would not be inequitable to Harris because the Harris Assignment expressly contemplates the termination of the 1973 Lease and the ORRI with it, and Harris got exactly what she bargained for, namely payment of ORRI over a 30 year period. That the Harris Assignment contemplated termination of the ORRI, however, does not mean it is not inequitable to now declare a portion of the 1973 Lease and the ORRI extinguished when 25 Hill treated the ORRI as remaining in existence at the time it acquired concurrent ownership of a portion of Section 24 and the lessee’s interest in the 1973 Lease. Essentially, 25 Hill seeks to establish that, based solely upon the circumstance of the fee and leasehold estates having been placed in 25 Hill’s ownership for a two and a half year period and its failure to payout a separate 16.66% royalty interest, the otherwise legitimate interests of Harris, which 25 Hill previously had acknowledged and accepted as valid during that same period, should be found to have disappeared. We do not agree and therefore conclude the trial court did not err when it granted Harris’s summary adjudication motion and denied 25 Hill’s motion.
DISPOSITION
The judgment is affirmed. Harris is awarded her costs on appeal.
WE CONCUR: Vartabedian, Acting P.J., Wiseman, J.