Sedco Intern., SA v. Cory

• Decision Date: 21 August 1981
• Docket Number: Civ. No. 77-85-D.
• Citation: 522 F. Supp. 254
• Parties: SEDCO INTERNATIONAL, S. A., Plaintiff, v. William F. CORY and Marcella McKillip, Executors of the Estate of Roy J. Carver, Deceased, Defendants and Counterclaim Plaintiffs, v. SEDCO INTERNATIONAL, S. A., Sedco, Inc., and Sedco Energy Corporation (formerly TerraMar Consultants, Inc.), Counterclaim Defendants.
• Court: U.S. District Court — Southern District of Iowa

522 F. Supp. 254

SEDCO INTERNATIONAL, S. A., Plaintiff, v. William F. CORY and Marcella McKillip, Executors of the Estate of Roy J. Carver, Deceased, Defendants and Counterclaim Plaintiffs, v. SEDCO INTERNATIONAL, S. A., Sedco, Inc., and Sedco Energy Corporation (formerly TerraMar Consultants, Inc.), Counterclaim Defendants.

Civ. No. 77-85-D.

United States District Court, S. D. Iowa, Davenport Division.

August 21, 1981.

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John H. McElhaney, Stanley E. Neely and Elizabeth Lang-Miers, of Locke, Purnell, Boren, Laney & Neely, Walter W. Cardwell III, Dallas, Tex., Ralph D. Sauer, of Betty, Neuman, McMahon, Hellstrom & Bittner, Davenport, Iowa, for plaintiff and counterclaim defendants.

David A. Elderkin and D. M. Elderkin, of Wadsworth, Elderkin, Pirnie & Von Lacken, D. G. Ribble, of Lynch, Dallas, Smith & Herman, Cedar Rapids, Iowa, for defendants and counterclaim plaintiffs.

OPINION AND ORDER FOR JUDGMENT

HANSON, Senior District Judge.

I.

This litigation is the aftermath of a Middle East oil venture gone sour. The principal questions in the case are whether the original defendant and counterclaim plaintiff, Roy J. Carver,¹ was induced to join the venture through fraudulent or negligent misrepresentations of certain agents of the counterclaim defendants, Sedco International, S.A., Sedco, Inc., and Sedco Energy Corporation (formerly TerraMar Consultants, Inc.); and, if so, how far the counterclaim defendants are liable for the expenses Carver incurred.

In brief outline, the facts are as follows. Carver was a citizen of Iowa whose Muscatine-based businesses, first in pumps (through Carver Pump Co.) and later in the recapping of tires (through Bandag, Inc.), made him a large personal fortune. Sedco, Inc., a Texas corporation with headquarters in Dallas, is a petroleum drilling contractor which through various of its divisions and subsidiaries also provides other services to the petroleum industry, including consulting services. Carver's (ostensible) partner in the venture here at issue was R. Eugene Holley, former lawyer, Georgia state senator, speculator in real estate and Texas oil wells, and paper multi-millionaire since come to grief. In October 1975 Holley and Carver formed the Holcar Oil Co., for the immediate purpose of reentering and exploiting three abandoned oil wells located in the waters of the Persian Gulf about 60 miles off the eastern shores of the state of Qatar. Carver had been led to believe by Amos Carter, a Sedco, Inc. vice president for mideast drilling operations, and by Robert Smith, president of TerraMar Consultants, Inc. (then operated as a division of Sedco, Inc.) that the wells could be reentered and production of saleable oil begun in less than three months for a total frontend investment of between $2 million and $2.5 million, with subsequent quick return of the investment and eventual enormous profits. Holcar contracted with the government of Qatar for (among other things) the right to reenter and produce the wells, and with Sedco International, S.A., a wholly-owned subsidiary of Sedco, Inc., for the services of an offshore drilling rig and its crew, to be used to reenter the wells and ready them for production. TerraMar, through Robert Smith and others, was to provide a wide range of services in aid of the venture. Carver and Holly both personally guaranteed payment of Holcar's debts to Sedco International, although Holley and Carver had agreed that the front-end investment would be made in whole by Carver, through the device of loans made by him to Holcar.

Work on the project began in Qatar in late January 1976. Things did not go as had been expected, for two main reasons. First, it was soon revealed that the effluent of the wells included large quantities of hydrogen sulfide (H2S), a gas that even in relatively small quantities has deleterious effects on equipment and on humans—on the latter to the point of quick fatality. To speak of nothing else, the presence of the H2S rendered any oil the wells might produce unsaleable absent prior elaborate and expensive separation of the gas from the oil: Carver was advised by experts in such matters that installation of the required production facilities would take at least nine months and cost from $13 to $14 million in addition to the expense connected with reentering and reworking the wells. Second, the reentry and workover of the wells did not itself proceed quickly or smoothly. Instead of taking less than three months, it took six, at an average daily cost of between $40,000 and $45,000. Even at that, work on one of the wells—the best producer of the three—was not completed, and that well may indeed have been ruined during its workover. By mid-August 1976, when Sedco reclaimed its rig and crew for rental to another customer, Holcar (hence Carver) had spent between $7 and $8 million on reentries and workovers alone. For this there was to show no saleable oil, and not even the prospect of saleable oil for many more months and millions to come. An additional $5 to $7 million (the exact figure is in dispute) was eventually expended on other aspects of the venture, including attempts to assemble production equipment capable of rendering saleable any oil the wells might eventually produce.

Carver was arguably on notice of the severity of the H2S problem as early as February 25, 1976, when relatively little had been spent: that is, an attempt was made to make him aware that the large amounts of H2S in the wells could very well prevent the generation of any income unless and until he invested some $13 to $14 million in completely unforeseen front-end expenses and waited at least nine more months, no matter how quickly the reentry and workover program should go. This raises the question whether, even assuming fraud or negligence in the inducement, Carver should be permitted to recover amounts expended after he knew the cost and time projections on the basis of which he had joined the venture were radically too low. Resolution of this question turns on the quality of the notice actually had on February 25 and afterwards, and on whether Carver acted, as he became increasingly aware of the huge additional front-end costs, in reasonable efforts to mitigate damages already incurred. In fact, he continued to act into the first months of 1977 in reliance on the advice of Amos Carter, who consistently assured him his further investments of time and money need not be nearly as great as others said, and of Robert Smith, who (along with Carter) assured him that even the largest further front-end expenditures being discussed would still be paid back, and with good profits besides, eventually. Whether or not this was good or even honest advice, which has been a subject of dispute between the parties, it is in any case clear that Carver acted on it as and while he did, both in continuing to fund the workover program and in investing in production equipment, in good faith efforts to salvage as much as possible of investments already made.

Carver's ability to generate cash to invest was not however unlimited; nor was his faith in Amos Carter and Robert Smith. By early 1977 he found himself unable to borrow the large sums still required on terms acceptable to him. Holley was on the verge of bankruptcy and unable to contribute anything. It was becoming increasingly clear that installation of production facilities would indeed cost many months and about $15 million, despite what Amos Carter had been saying. Finally, Carver was given reason to doubt that the wells were capable of producing sufficient oil to pay back his investment, let alone generate a reasonable profit. Beginning in early 1977, Holcar's efforts to develop the wells by itself ceased, and both Carver and Holley began looking for a partner for Holcar willing to invest the further sums needed to bring the venture to fruition. Such a partner was eventually found in the person of the Attock Oil Company, a Pakistani corporation, with which final agreement was reached in November 1977. By then, however, the government of Qatar had become disenchanted with Holcar, for reasons that require to be explored in further detail. The government refused to permit Attock to join the venture as Holcar's partner, and in early 1978 ended matters by cancelling its agreement with Holcar. Holcar never made a cent.

This suit was commenced in this district on December 14, 1977, by Sedco International, against Holcar and Carver, to recover amounts still owing for the services of Sedco's drilling rig, whose payment Carver had personally guaranteed.² Holcar was quickly dismissed from the action;³ subject matter jurisdiction of this Court over the action against Carver (now his executors) is proper under 28 U.S.C. § 1332. By way of answer to the claim against him, Carver set up defenses of improper and incomplete workmanship by Sedco International, and fraud in the inducement of the personal guaranty sued upon. By way of counterclaim against Sedco International, and additionally against Sedco, Inc., TerraMar, Amos Carter, and Robert Smith, Carver alleged fraud, conspiracy to defraud, and negligent misrepresentations; subject matter jurisdiction of the counterclaim is again proper under 28 U.S.C. § 1332.⁴ Sedco, Inc., TerraMar, Amos Carter, and Robert Smith all moved to dismiss the claims against them, arguing that this Court lacked personal jurisdiction over them. Following a hearing on the motion to dismiss, the Court (per Judge Stuart)⁵ dismissed Amos Carter and Robert Smith from the action, but found sufficient basis for the exercise of personal jurisdiction over Sedco, Inc. and TerraMar.⁶ In their joint answer to the counterclaim, Sedco International, Sedco, Inc., and TerraMar raised by way of denial and affirmative defense a variety of issues that shall be addressed herein....