McDonald v. O'MEARA

• Citation: 473 F.2d 799
• Decision Date: 21 May 1973
• Docket Number: No. 72-1205.,72-1205.
• Parties: Albert J. McDONALD, Plaintiff-Appellee-Cross Appellant, v. Robert W. O'MEARA et al., Defendants-Appellants-Cross Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

473 F.2d 799 (1973)

Albert J. McDONALD, Plaintiff-Appellee-Cross Appellant, v. Robert W. O'MEARA et al., Defendants-Appellants-Cross Appellees.

No. 72-1205.

United States Court of Appeals, Fifth Circuit.

January 24, 1973.

Rehearing Denied February 27, 1973.

Certiorari Denied May 21, 1973.

Murphy Moss, Charles C. Gremillion, New Orleans, La., for appellant.

Sidney W. Provensal, Jr., New Orleans, La., Victor A. Sachse, Baton Rouge, La., for appellee.

Before JOHN R. BROWN, Chief Judge, and RIVES and CLARK, Circuit Judges.

Certiorari Denied May 21, 1973. See 93 S.Ct. 2293.

JOHN R. BROWN, Chief Judge:

The question in this case is whether a sublessee of a Louisiana oil, gas and minerals lease who has specifically undertaken to defend the title of the lessor-sublessor can during the pendency of the sublease make a trade-out with those holding the known competing titles thereby giving him substantial advantages without accounting fully to his principal-lessors. The District Judge in this diversity suit held in the negative. We affirm.

How It All Came About

The Wisner group claimed ownership to Lot No. 3. They granted an oil, gas and mineral lease to McDonald on a 1/6 royalty basis, which expressly disclaimed warranty of title and imposed on the lessee McDonald very substantial obligations to actively defend at his sole expense their title against all adverse claimants — one of which was known to be the eventually successful Broussard title. Shortly thereafter McDonald subleased Lot No. 3 to O'Meara on the basis of a 1/8 of 8/8 overriding royalty. O'Meara expressly assumed McDonald's obligation to defend the title.

In the meantime Tidewater Oil Company,¹ unsuccessful in obtaining a lease from the Wisner group, secured one from the Broussards.

Finding O'Meara to be derelict in his duty to defend the Wisner title, McDonald subsequently declared the sublease forfeited and filed suit in state court to obtain a judicial decree to that effect. Within a week of McDonald's instigation of this suit O'Meara made a trade-out with Tidewater. Under the terms of the agreement O'Meara was to receive one-third of the working interest production after deducting all production costs and Tidewater two-thirds, subject to alteration when the validity of the legal title was ultimately adjudicated. Thus, O'Meara would receive a 29% net if the Broussard title was upheld, but only a 15% net if the Wisner-McDonald title prevailed.

As a sequel to the state court suit which terminated the O'Meara sublease, McDonald, for himself and the Wisner group, filed this suit (subsequently removed to federal court) seeking a declaratory judgment that by this double dealing O'Meara² had forfeited his claim to any benefits under the agreement and should hold all the benefits accruing to him from the Tidewater-O'Meara contract for McDonald-Wisner. The District Court found that O'Meara had indeed played both ends against the middle with his "Heads-I-win, Tails-you-lose" deal and granted a declaratory judgment for McDonald. We affirm.

The Unfaithful Servant

When the Wisners first leased the lot in question to McDonald they were fully aware of the impending challenge to their title. Thus, after disclaiming any warranty of title, part and parcel of the deal with McDonald was an express assumption on his part of the defense of the Wisner title. This was spelled out in detail in a contemporaneous letter. McDonald subsequently subleased the lot to O'Meara retaining a 1/8 overriding royalty. McDonald also exacted from O'Meara a specific undertaking to carry out McDonald's obligation to protect and perfect the Wisner title.³

Meanwhile, Tidewater Oil Company taken a mineral lease from one Felix Broussard on this same lot. Notwith standing his awareness of the Wisner claim to the legal title to this property, O'Meara allowed Tidewater to cross another lot owned by him and commence drilling operations on the lot in question on June 8, 1956. Although he was bound to take affirmative action to protect the Wisner title, O'Meara did not invoke legal processes to stop this drill ing or challenge Tidewater's (Broussard) claim until October 19, 1956. On that date he succumbed to McDonald's repeat ed demands for action by filing suit against Broussard.

O'Meara's procrastination and lacka daisical prosecution of the case subse quently caused McDonald to declare the sublease terminated. On November 14, 1956 this was followed by his suit in court to obtain a judicial declaration of the termination of the sublease. Just six days later the O'Meara-Tidehad water trade-out agreement was consum-P. mated.

McDonald—still ignorant of the trade-McDonald out and thus unaware of the relationship between his putative sublessee and the adverse claimant—continued his own cancellation suit against O'Meara with one hand and took on O'Meara's burden in the suit against Broussard with the other. While the results of both of these lawsuits are helpful in our efforts to paint the cosmic picture, the state court's resolution of McDonald's suit against O'Meara is particularly pertinent—and at points completely decisive—to the precise issues presented for our determination.⁴

O'Meara A Double Dealing Defaulter

The opinion order of the 17th Judicial District Court, Parish v. Terrebone (Division B), State of Louisiana, in McDonald v. O'Meara (No. 17.233)⁵ pulled no punches with respect to O'Meara's conduct. The court found that, "not only did he fail to give any assistance toward the proper disposition of the trial of this case on the merits so that this court might know the actual truth, regardless of legal technicalities, but he fought and resisted even the taking of testimony of other people, such as officials of Tide-water."

Finding that O'Meara stood in a fiduciary relationship to McDonald which he had failed to recognize, the court concluded that he should and "could not morally or lawfully acquire any interest adverse to McDonald." The court was particularly impressed, in this regard, by O'Meara's conduct vis a vis McDonald's rights and the conduct of Tide-water.

"Not only did O\'Meara fail to fight back at Tidewater in protecting the rights of his sublessor (and at the same time protect the Wisner rights), but he cooperated with Tidewater by permitting Tidewater to go through his own canal in Lot 4 in order to explore on the property involved in this lawsuit."

The Louisiana court found that O'Meara then added injury to insult by making the written agreement with Tidewater "to settle the dispute between O'Meara and Tidewater concerning the subleased Wisner property (Lot No. 3) and by doing so O'Meara obtained a personal advantage. This advantage did not inure to the benefit of McDonald, lessor of his subleasee O'Meara, and, as such, the contract between O'Meara and Tidewater was a breach of trust and duty, and in plain violation of the sublease." Summing these facts up, the Louisiana court found that "O'Meara fully contemplated and intended to take advantage of this situation, and that his attempts failed because of McDonald's diligence." Therefore, the court rendered judgment cancelling the McDonald-O'Meara sublease and reserving a right in McDonald to sue for damages.⁶

The Day of Reckoning

In the Federal Court suit below, the district court held the judgment of the state court to be collateral estoppel on the issue of breach of a fiduciary duty. We think that this was clearly correct.

Louisiana law permits — indeed, requires — the use of the doctrine of collateral estoppel to prevent the relitigation of issues where the following circumstances exist: (i) the issue in the subsequent suit must be identical to the one involved in the prior action, (ii) the issue must have been actually litigated in the prior action and (iii) the determination of the issue in the prior action must have been necessary and essential to the resulting judgment. See California Co. v. Price, 1957, 234 La. 338, 99 So.2d 743; Williams v. Marionneaux, 1960, 240 La. 713, 124 So.2d 919; Cauefield v. Fidelity and Casualty Co. of New York, 5 Cir., 1967, 378 F.2d 876; Friedenthal v. General Insurance Co. of America, 5 Cir., 1968, 395 F.2d 202; City of New Orleans v. United States, 5 Cir., 1967, 371 F.2d 21. The question of whether O'Meara had breached a fiduciary duty to McDonald was certainly necessary and essential to a holding that the sublease should be cancelled. There is no question that it was litigated, and it is the crucial issue in the present declaratory judgment action. The trial court was thus correct in applying the Louisiana-accepted doctrine of collateral estoppel.

Central to the federal court's holding that the O'Meara-Tidewater agreement of November 20, 1956, was repugnant to the fiduciary duty owed by O'Meara under the sublease was its determination that for the purposes of mutual duties of lessor-lessee the sublease was effective until September 9, 1961, when the opinion-judgment in the cancellation suit was rendered by the state court (see note 5, supra).

The date the decree became effective or the date which the decree regarded as significant is, of course, a matter of state law. The state court's judgment was, significantly, cast in the present tense — "that there should be judgment . . . terminating, and cancelling" (emphasis added). We hold that the conclusion of the federal court was permissible under the prevailing Louisiana authority, especially since, as the Judge pointed out, equitable considerations are recognized, even by Louisiana's civil law, to allow a court to consider what result would obtain under variable dates. See Fontenot v. Sunray Mid-Continent Oil Co., La.App., 1967, 197 So.2d 715, 722; Sellers v. Continental Oil Co., La.App., 1966, 188 So.2d 466.

This conclusion is further supported by other factors. First, O'Meara himself put forth a strident defense of his rights under the sublease for nearly five years. Second, Tidewater referred specifically to the...