                                                 No.    86-179

                   I N THE SUPREME COURT OF THE STATE OF MONTANA

                                                       1986




JOHN S T E F F E N ,

                       P l a i n t i f f and A p p e l l a n t ,



DEPARTMENT OF STATE LANDS, BOARD OF LAND COMMISSIONERS,
DENNIS HEMMER, COMMISSIONS OF STATE LANDS,

                       D e f e n d a n t s and R e s p o n d e n t s .




APPEAL FROM:           D i s t r i c t C o u r t of 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 C o u n t y of L e w i s and C l a r k ,
                       T h e H o n o r a b l e H e n r y L o b l e , Judge p r e s i d i n g .


COUNSEL OF RECORD:


           For Appellant:

                       G o u g h , Shanahan, Johnson and W a t e r m a n ;
                       Jock 0. Anderson, H e l e n a , M o n t a n a


           For R e s p o n d e n t :

                       L y l e Manley, H e l e n a Montana




                                                       Submitted:            July 1 0 , 1986

                                                          Decided:           S e p t e m b e r 9 , 1986




                                   &a,-                                  #


                                                       Clerk
Mr.    J u s t i c e Fred J. Weber d e l i v e r e d t h e Opinion o f t h e C o u r t .


        Mr.    S t e f f e n a p p e a l s a d e c i s i o n o f t h e D i s t r i c t Court f o r

Lewis and C l a r k County.                The c o u r t a f f i r m e d t h e d e c i s i o n of

t h e Department o f S t a t e Lands (Department) t h a t by s u b l e t t i n g

g r a z i n g l a n d l e a s e d from t h e S t a t e , M r .     S t e f f e n had l o s t h i s

p r e f e r e n c e r i g h t t o renew t h e l e a s e .      W reverse.
                                                                e

        The i s s u e i s whether t h e d e n i a l o f M r .            Steffen's prefer-

e n c e r i g h t was u n l a w f u l .

        I n 1972 M r .       S t e f f e n was i s s u e d a 10-year s t a t e l e a s e on

a 640 a c r e t r a c t o f s c h o o l t r u s t l a n d i n Dawson County.                 This

l a n d had been l e a s e d by t h e S t e f f e n f a m i l y f o r u s e w i t h t h e i r

adjacent 1 4 4 0 a c r e s s i n c e t h e 1920's.                  The l a n d i s g r a z i n g

land,     but Mr.        S t e f f e n had n o t owned c a t t l e s i n c e t h e l a t e

1960's.          During      the     years       1972 t h r o u g h    1978, M r .     Steffen

subleased t h i s         tract      of    s t a t e l a n d t o Ronald        Svenvold f o r

c a t t l e grazing.        A l l o f t h e s u b l e a s e s e x c e p t t h e one f o r t h e

year     1977 were         f i l e d w i t h and approved by t h e Department.

The s u b l e a s e s r a n from May o r June u n t i l September o r October

of each year.

        Under      S   77-6-205,          MCA,    a   state      l e s s e e who w i s h e s   to

renew t h e l e a s e i s e n t i t l e d t o a p r e f e r e n c e o v e r o t h e r s who

wish t o l e a s e t h e land.             I n 1979 t h i s C o u r t i s s u e d an o p i n -

i o n , J e r k e v . S t a t e Dept. o f Lands ( 1 9 7 9 ) , 182 Mont. 294, 597

P.2d 49, i n which i t h e l d t h a t a l e s s e e ' s p r e f e r e n c e r i g h t t o

renew a l e a s e i s l o s t when t h e l e s s e e d o e s n o t u s e t h e l a n d

b u t s u b l e a s e s it f o r t h e e n t i r e l e a s e p e r i o d .

        Mr.    S t e f f e n d i d n o t s u b l e a s e t h e s t a t e l a n d i n 1979.     In

r e s p o n s e t o h i s i n q u i r y , he was a d v i s e d by then-Commissioner

o f S t a t e Lands Leo B e r r y , Jr. t h a t he c o u l d t a k e i n c a t t l e on

t h e s t a t e l a n d and it would n o t be c o n s i d e r e d a s u b l e a s e s o
long as he managed both the land and the cattle.   In 1980 and
1981, Mr.   Steffen entered    supplemental lease agreements,
taking in livestock belonging to Doug Svenvold, son of Ronald
Svenvold.   In October 1981, when the term of his lease was
nearing its end, Mr. Steffen was advised in a letter from the
Department that he was entitled to the preference right to
meet the bid of any competing bidder and renew his lease.
However, in February 1982 he was advised by the Commissioner
of State Lands that the previous letter was incorrect and
that because he had subleased the grazing right he had lost
his preference to renew the lease.   He was required to make a
competitive bid for the lease.   His was the high bid, and the
new lease was issued to him.
     Mr. Steffen then requested and was granted a hearing
before the Commissioner of State Lands on the matter of the
loss of the preference right.     The Commissioner determined
that the Department was correct in ruling that Mr. Steffen
had lost his preference right.    He found that the Svenvolds
exercised the primary management of the cattle during the
terms of the subleases.    He concluded that a lessee of state
grazing land is buying the forage, which is expressed in
AUM's.   An AUM is the amount of forage one animal unit (a cow
and calf pair) will consume in a month.      The Commissioner
concluded that when the available AUM's are consumed by a
sublessee's cattle, the land will be considered subleased for
the entire year.    Mr. Steffen's sublessee's cattle used up
most of the available AUM's each year.       The Commissioner
cited this Court's opinions in Jerke and Skillman v. Depart-
ment of State Lands (1980), 188 Mont. 383, 613 P.2d 1389, in
support of his decision.
     Mr. Steffen appealed to District Court.      The ~istrict
Court affirmed the administrative decision.    It stated that
the Commissioner's findings of fact are supported by substan-
tial credible evidence, and that the opinion was sound and
legally correct and would not be overturned.
     In its brief, the Department has correctly stated the
standards of review of administrative decisions.      We must
affirm administrative findings of fact unless they are clear-
ly erroneous; if the record contains support for the agency
findings, this Court may not weigh the evidence.      City of
Billings v. Billings Firefighters (1982), 200 Mont. 421, 430,
651 P.2d 627, 632.   The scope of review of agency conclusions
of law is greater.   An agency conclusion may be reversed if
it represents an abuse of discretion.   Billings, 651 P.2d at


    The Commissioner's findings included these:

    10. During the years 1972 through 1981, Mr.
    Steffen alleged he performed some of the management
    functions.   He made sure that the state was paid
    for the lease. He controlled access when the land
    was not being subleased, and at one time advised a
    seismic exploration company that they must apply to
    the Department of State Lands prior to entering the
    state land for exploration purposes. Mr. Steffen
    had authority as to when the cattle were to be put
    on and taken off of the land, and as to the number
    of cattle placed on the state land. This authority
    was used however, in conjunction or in consultation
    with the Svenvolds.     Mr. Steffen directed, at
    times, the placement of the Svenvolds' salt blocks,
    cattle scratchers and calf feeders which were
    located on the state land.       He performed weed
    control on the land.    He provided water, to the
    state land, through his own improvements.       Mr.
    Steffen at one time disposed of one of the
    Svenvold's cows which had died on the state land.
    Mr. Steffen, at times, farmed an adjacent tract,
    and was therefore, able to monitor the state land.
    Mr. Steffen, at times, repaired and maintained the
    fences, and he occasionally returned the Svenvolds'
    stray cattle to the state land.
    11. During the years when Svenvold cattle were on
    the state land Doug Svenvold kept a watch on the
     cattle, both for himself and for his father. There
     was no difference of opinion between Doug Svenvold
     and Mr. Steffen as to when the cattle were to be
     placed on the state land. Apparently the parties
     jointly decided the 'turn in' dates. The Svenvolds
     placed their own salt blocks, calf feeders, and
     back scratchers on the land and refilled the feed-
     ers when needed. The Svenvolds also supplied the
     feed supplements and the fly powder for the cattle.
     In addition, the Svenvolds, at times, decided where
     to place the salt, scratchers and feeders in order
     to ensure uniform grazing. The Svenvolds did some
     of the fence maintenance and used about $ 2 0 0 . 0 0
     worth of their own material in so doing.        Mr.
     Steffen rarely, if ever, assisted in placing the
     cattle on the land or taking them off.          The
     Svenvolds, on occasion, took responsibility for
     disposing of dead cattle.
          Both Mr. Steffen and the Svenvolds exercised
        12.
     elements of management of the state land.      The
     Svenvolds exercised the primary management of the
     cattle while the subleases were in existence. This
     means that the Svenvolds were exercising the vital
     elements of managing the leasehold interest while
     the allowable AUM's were being consumed by the
     Svenvold cattle.
There is support in the record for the above findings of
fact.     With the exception of the last sentence in paragraph
12, the District Court's      determination that the findings
could not be disturbed was correct.
     The determination of which party is exercising the vital
elements of managing this leasehold interest is a         legal
conclusion.    The last sentence in paragraph 1 2 should proper-
ly appear in the conclusions of law.       The Commissioner re-
stated it there:

    1. When the state leases grazing land, the lessee
    is buying the forage, which is expressed in AUM's.
    When those AUM's are consumed the lease has little,
    if any, value for the rest of that year. There-
    fore, when a state lessee subleases the land, and
    all or nearly all the AUM's are used by the
    sublessee, it does not matter whether           the
    sublessee's livestock are on the land one month or
    twelve months for purposes of calculating the
    duration of the sublease.       As a result, the
    Svenvolds subleased this state tract for at least 7
    of the 1 0 years.
        2. Mr. Steffen did not exercise the majority of
        the management of this lease.      He allowed the
        Svenvolds to exercise most of the elements of
        management. As a result, the arrangement with the
        Svenvolds did not include a retention of management
        by Mr. Steffen within the spirit of the Jerke and
        Skillman cases (cited in the following Opinion),
        and the Department correctly determined that Mr.
        Steffen lost his preference right.
As discussed above, the standard of review of agency conclu-
sions of law is whether they represent an abuse of discre-
tion.        Before   analyzing   whether   the   Commissioner's
conclusions represent an abuse of discretion, it is appropri-
ate to review the facts and holdings in Jerke and Skillman.
        In Jerke, this Court held that the preference in lease
renewal had been unconstitutionally granted to the lessee
Grazing District, because the District subleased the land for
the entire 10-year term.    The Court reasoned that the prefer-
ence right seeks to include the concept of sustained yield
within the policy of obtaining full market value on leases of
state land.      It induces the state's lessees to follow good
agricultural practices and make improvements on the land.
The Court stated:

    Where the preference right does not further the
    policy of sustained yield, it cannot be given
    effect. In such a situation, full market value can
    be obtained only by pure competitive bidding.
    Here, the Grazing District, the holder of the
    preference right, does not even use the land; it
    cannot use good agricultural practices or make
    improvements thereon. Likewise, the actual user of
    the land, who as a member of the Grazing District
    is prevented from bidding on the lease, is not
    motivated to further the policy of sustained yield.
    There is no guarantee the Grazing District will
    exercise its preference right and moreover, if it
    does, the actual user is not assured the land will
    be allocated to him.
    To allow the preference right to be exercised in
    this case would be to install the Grazing District
    as the trustee of the land.    It, rather than the
    Department of State Lands, would decide who will
    occupy the land but it would not be bound by a
    constitutional or fiduciary duty.    Under such a
        scheme, the policy of sustained yield would have no
        place.
        To allow an existing lessee who does not use the
        land to exercise a preference right constitutes an
        unconstitutional application of the preference
        right statute.   ..
Jerke, 597 P.2d at 51.
        In Skillman, this Court upheld the district court's
application of the rule in Jerke to an individual lessee who
violated the terms of his lease by subletting without the
required approval of the Department.            The Department had
discovered the violation and cancelled the lease, but the
lessee then paid a penalty and the lease was renewed.           The
matter was taken to District Court by Mr. Skillman, another
party who wished to lease the land.             The District Court
applied Jerke and ordered the land reopened for competitive
bidding.     This Court held that "[elvery point of law and
every policy consideration is as applicable to [this lessee]
as it was to the grazing district."        Skillman, 613 P.2d at
1391.     The judgment of the District Court was affirmed, and
the lease was reopened for bidding.
        In the present case, it is not true that every point of
law and every policy consideration set out in Jerke is appli-
cable.      The Department's findings of fact show that Mr.
Steffen retained significant responsibility and control over
the leased land throughout the sublease periods.       Mr. Steffen
retained control of whether the property should be grazed by
subleasing for only one grazing season at a time.           He re-
tained control of what months of the year the property would
be grazed.      He retained responsibility for weed control,
developed and retained responsibility for the water supply,
and retained responsibility for fences.          He also retained
responsibility     for   controlling   public    access,   retained
control over the locations of feeders, scratchers, and salt
blocks, monitored the cattle to ensure the allowable AUM's
were not exceeded, and retained responsibility for paying the
State its annual lease payment.        While it appears that the
sublessees were primarily        responsible for the day-to-day
management of the cattle, it is not true in this case that
management of the cattle is synonymous with management of the
leasehold interest in the land.      We conclude that Mr. Steffen
retained responsibility for the essential elements of the
leasehold interest in the land.      There has been no allegation
whatsoever of mismanagement of the land, and the constitu-
tional rationale set out in Jerke and Skillman is inapplica-
ble.      We hold that the Department's conclusion that Mr.
Steffen is no longer entitled to his preference right repre-
sents an abuse of discretion.
       An additional question is raised by the facts and the
law in Skillman.        Is Mr. Steffen's failure to file his sub-
lease with the Department in 1 9 7 7 a sufficient ground for
denial of his right to the preference?        This issue was not
addressed by the Department's order; the failure to file was
not discovered until the hearing before the Commissioner.
Section 77-6-205 (3), MCA, provides for discretionary cancel-
lation of a renewal lease of state lands for a violation of
the terms of the lease, but the violation must not have
occurred more than 3 years prior to the date on which a
notice of cancellation is issued.      Since no notice of cancel-
lation has been issued, and the unfiled lease was for the
year 1 9 7 7 ,   the time limit for cancellation of the lease has
passed.      It is too late for denial of the preference on that
ground.
     We reverse the decision of the District Court and remand

to the District Court for appropriate action to reinstate Mr.
Steffen's preference right.




We Concur:
                   '
                   2




        Justices
