Hathaway v. Porter Royalty Pool, Inc.

• Citation: 295 N.W. 571,296 Mich. 90
• Decision Date: 06 January 1941
• Docket Number: No. 65.,65.
• Parties: HATHAWAY et al. v. PORTER ROYALTY POOL, Inc., et al.
• Court: Supreme Court of Michigan

296 Mich. 90

295 N.W. 571

HATHAWAY et al.

v.PORTER ROYALTY POOL, Inc., et al.

No. 65.

Supreme Court of Michigan.

Jan. 6, 1941.

Suit by Glenn R. Hathaway and others against Porter Royalty Pool, Incorporated, and others, to remove a cloud on title from land and for rescission of a royalty agreement and an accounting for oil removed from the land, wherein part of the defendants filed cross-bills asking the same relief as prayed for by plaintiff. From a decree granting rescission of agreement and an accounting, Porter Royalty Pool, Incorporated, and others, appeal.

Decree vacated and decree directed to be entered in favor of appellants.Appeal and Cross-Appeal from Circuit Court, Midland County, in Chancery; Ray Hart, Judge.

Argued before the Entire Bench.

Charles H. Goggin, of Alma, Miller, Bevan, Horwitz & Des Roches, of Detroit, Ralph L. Goggin, of St. Louis, and Alfred H. Sauer, of Bad Axe, for defendants, appellants and cross-appellees.

Smith & Hunter, of St. Johns, for plaintiffs and appellees and cross-appellants.

Cook, Smith, Jacobs & Beake, of Detroit, Ralph J. Hyde, Joel H. Kahn, and Chester E. Morris, all of Midland, Shields, Ballard, Jennings & Taber, of Lansing, Hand & Hand, of Bay City, and Robert J. Curry, of Saginaw, for certain defendants, cross-plaintiffs, appellees and cross-appellants.

McALLISTER, Justice.

Plaintiffs filed their bill of complaint to remove a cloud on title from their lands in Porter township of Midland county, and asking rescission of a royalty agreement and an accounting for oil removed from the lands in question. Their bill is based upon allegations of fraud and the sale of stock in violation of the blue sky law, 2 Comp.Laws 1929, § 9769 et seq. The trial court found that there was no merit to the claim of fraud, but granted the relief sought on the ground of violation of the statutes relating to the sale of corporate securities.

The suit was brought against 154 defendants owning about 95 parcels of land, as well as others, including promoters and trustees; and the defendant owners of about 30 other parcels filed cross-bills asking the same relief as prayed for by plaintiffs. The remaining defendants filed answers.

The controversy has for its background the discovery of oil in Chippewa township in Isabella county in the early part of 1928. Subsequent thereto, in 1929 and 1930, many commercially producing oil wells were drilled in Greendale township in Midland county.

Defendant Kirkham was an expert geologist of large experience. He held the office of executive vice-president, general manager, director, and chief geologist of the Michigan Pacific Oil and Gas Company, a corporation with offices in New York city. Defendants Bangs and McCutcheon were promoters from Detroit who had had previous experience in the organization of oil and gas royalty pools.

Kirkham, after association with and work for the Washington State Geological Survey, the United States Geological Survey, and the United States Bureau of Mines, came to Michigan in 1928 on behalf of certain private interests for the purpose of making a survey of the location of oil deposits. During 1929, he made an investigation and a survey of the counties of Alpena, Presque Isle, Montmorency, Cheboygan, Alcona, and Huron. He also made a study of Tuscola, Sanilac, and Midland counties.

In 1930, the Michigan Pacific Oil and Gas Company was organized, and defendant Kirkham reported, in the same year, to the company, the advisability of securing oil leases in Midland county. Much of the land of the township had been leased to other oil companies, but Kirkham was able to secure leases for the company on a certain area. One of such leases was on the northwest 1/4 of the northwest 1/4 of section 26 of Porter township, upon which drilling operations were commenced and oil produced in small quantities on August 28, 1931. This well was known as the Joseph Otway No. 1; and the discovery of oil in this location stimulated activity in the development projects.

It was after the production of oil from this well that defendants Bangs and McCutcheon took steps to organize an oil and gas royalty pool in Porter township. They consulted with defendant Kirkham, and employed him to map out a potential oilproducing area in the township which comprised, roughly, the central portion of the township, together with connected outlying acreage. They also caused to be prepared agreements to be executed by owners of the land within the area. This agreement provided for a pooling, by the owners signing the contract, of one-half of the royalties that might be received by them from oil companies as a result of the production of oil and gas.

Among the provisions of the contract were stipulations of conveyance by the landowners of one-half of their oil royalty rights to three trustees for purposes of incorporation. It was further set forth in the contract and an escrow agreement, that a corporation was to be organized within five years, on condition, however, that owners of 4,000 surface acres of land within the prescribed area should have entered into such an agreement, and that also within the said period a well should be discovered on such land from which oil and gas would be produced in commercial quantities. It was further provided that in the proposed company, common stock would be issued, upon incorporation, to the owners signatory to the contract, in proportion to their acreage; with the effect that when oil would be produced from any of the pooled land, the income from the royalties would be paid into the corporation and distributed among the members according to their holding of stock, the ratio being that of acreage pooled by each landowner to the total acreage in the pool. The basic purpose of the pool was to protect the oil royalty owner against the danger of his own parcel of land being non-productive and to insure that all members of the pool would participate in any oil produced in the pool area no matter where found therein. The contract also set forth that the promoters, Bangs and McCutcheon, would pay all the expenses of the venture up to the time that such corporation was organized; and that said promoters, in consideration of their services in the formation and organization of the pool and the corporation, would receive 25 per cent of the common stock issued to each owner signing the contract. Bangs and McCutcheon agreed with Kirkham to transfer one-fifth of their shares to him in consideration of his services.

At first, the plan for a pooling agreement met with little enthusiasm among the landowners in the area because of a feeling of optimism that the properties would generally produce oil in large quantities. But after the drilling of several ‘dry holes', apparently it was recognized that the landowners would be more secure under a pooling arrangement and by April 1, 1932, numerous owners had pooled their oil rights, according to the agreement, in more than 4,000 acres of land within the prescribed area.

One of the conditions of the agreement having been fulfilled, namely, that owners of at least 4,000 surface acres enter into the agreement within the required time, a meeting of such owners was held on April 6, 1932, at the Grange Hall in Porter township, for the purpose of perfecting the organization. At this meeting a by-law committee was chosen, and thereafter legal counsel was employed. Such counsel advised the group that there could be no organizationof the contemplated corporation until the second condition of the agreement was fulfilled, namely, that there be a producing well on the property. Subsequently a producing well was brought in on the pool lands, and parties to the pooling agreement were then given notice of a meeting to be held for the purpose of adopting bylaws and signing and executing articles of incorporation.

The meeting was held April 24, 1933, and was attended by most of the parties to the agreement, but inasmuch as the by-laws had not yet been finally approved, it was determined not to execute the articles of incorporation until later, and a waiver of notice of a meeting to which the group adjourned, was signed by many of the parties present. However, there had been raised the question of whether the pooling arrangement came within the provisions of the blue sky law, 2 Comp.Laws 1929, § 9769 et seq. and accordingly a committee proceeded to the office of the Corporation and Securities Commission at Lansing, and apparently was advised that the organization did not come within the provisions of that statute.

Thereafter, on April 28, a meeting was held in the bank at St. Louis, Michigan, at which many of the plaintiffs and crossplaintiffs were in attendance. The group was then advised of the meeting of the committee with the securities commission, and thereafter articles of incorporation were signed by 25 incorporators. A temporary board of directors was elected; the articles were accepted for filing with the secretary of State; and the Porter Royalty Pool, Inc., was duly incorporated on May 2, 1933. Another meeting of the members of the pool was held in the high school at St. Louis on May 10, 1933, when the bylaws, which had been prepared, were submitted. Considerable discussion was had with reference to the organization, and permanent directors were elected, among whom were four present cross-plaintiffs. Thereafter, a secretary was elected, the board checked over the pool agreements, and caused them to be recorded in the office of the register of deeds. Stock certificates were issued, and orders were signed for royalty oil, going to the pool under the agreement, and the corporate and franchise fees were paid. A resolution was passed authorizing legal proceedings against certain parties to the pooling agreement who refused to allow their oil to go into the pool.

During this time, oil wells were being brought in in the prescribed area, and by the latter part of 1933, about 20 successful wells had...