Palmer v. Fuqua

• Decision Date: 08 April 1981
• Docket Number: No. 79-2807,79-2807
• Citation: 641 F.2d 1146
• Parties: Oscar C. PALMER, Sr., Trustee, Oscar Palmer, Revocable Trust, and Corinne Palmer, Revocable Trust, Plaintiff-Appellee, v. J. B. FUQUA, J. Rex Fuqua and Hytech Energy Corporation, Defendants-Appellants. . Unit A
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1146

641 F.2d 1146

Oscar C. PALMER, Sr., Trustee, Oscar Palmer, Revocable Trust, and Corinne Palmer, Revocable Trust Plaintiff-Appellee, v. J. B. FUQUA, J. Rex Fuqua and Hytech Energy Corporation Defendants-Appellants.

No. 79-2807.

United States Court of Appeals, Fifth Circuit.

Unit A

April 8, 1981.

Ronald D. Krist, Stanley J. Krist, Scott Douglas Cunningham, Houston, Tex., for defendants-appellants.

James V. Hammett, Jr., Austin, Tex., for Hytech Energy Corp.

Groce, Locke & Hebdon, John R. Locke, Jr., San Antonio, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Western District of Texas.

Before WISDOM, POLITZ and SAM D. JOHNSON, Circuit Judges.

SAM D. JOHNSON, Circuit Judge:

In this Texas diversity action, plaintiff Oscar C. Palmer, Sr., a limited partner in a partnership known as Atlanta Limited No. 2, successfully sought to impose a constructive trust on an undivided one-sixth interest in an oil and gas lease, hereinafter referred to as the Ritchie lease. The district court held that by failing to offer Palmer the opportunity to participate in the acquisition and development of the Ritchie lease, defendant J. B. Fuqua, the sole general partner in the partnership, had breached the Limited Partnership Agreement of Atlanta Limited No. 2 and had violated his fiduciary obligation. Inasmuch as the trial court committed no reversible error, we affirm.

This suit is based upon a written limited partnership agreement entered into by Palmer, a limited partner, J. Rex Fuqua, a limited partner, and J. B. Fuqua, the general partner. ¹ Article 1.02 of the partnership agreement provides that the purpose of the partnership was to:

Acquire, by purchase or otherwise, oil and gas leases and oil and gas mineral properties and interests therein, to explore such leases and properties for the production of oil and gas by whatever methods, to complete test wells and to make arrangements for the development and operation of such oil and gas properties in such areas as may be selected at the discretion of the General Partner.

This case involves a dispute over the interpretation of the phrase "area of interest owned" contained in Article 10.06 of the Limited Partnership Agreement of Atlanta Limited No. 2. Article 10.06 states:

All of the Partners reserve the right to acquire oil and gas properties and conduct oil and gas exploration and development activities for their own accounts or for others, including other oil and gas ventures, programs and partnerships during the term of this Partnership. However, any property or properties acquired in the area of interest owned by this Partnership shall be offered first to the Limited Partners in this Partnership who will have twenty (20) days in which to accept or refuse participation in the acquisition of such property or properties.

I. Facts

This partnership was originally initiated by Charles S. Beck, an oil and gas promoter in San Antonio, Texas, who deals individually and as Capitol Resources, Inc., a company controlled and managed by Beck. Prior to the formation of Atlanta Limited No. 2, Beck and the Fuquas participated in two other oil and gas ventures promoted by Beck. ² Early in 1976, Beck contacted a group of potential investors, including Palmer and the Fuquas, with respect to certain oil and gas leases he wished to acquire. By letter dated April 22, 1976, Palmer and Capitol Resources, Inc. entered into an agreement to develop certain oil and gas leases in Wilson County, Texas. Although no mention of the Fuquas was made in this letter of agreement, there was testimony at trial indicating that Beck informed Palmer that the Fuquas would also join in this venture. ³ Palmer and Beck subsequently entered into an addendum ⁴ to the letter of agreement that was executed in order to:

evince the intention of the parties to enter into a Limited Partnership Agreement which shall provide for the participation by Palmer, as a limited partner, in the development and production of oil and gas leases (and oil wells being or to be drilled thereon) identified in Schedule 1 attached hereto ("Leases").

Schedule 1 described various oil and gas leases, one of which was the Beever Brothers lease, ⁵ to be drilled in Dimmitt, Frio, LaSalle, Wilson, and Caldwell Counties. ⁶ The addendum provided that Palmer would bear one-sixth of the costs and expenses of development, with J. B. Fuqua (one-third), J. Rex Fuqua (one-third), and Beck (one- sixth), sharing the balance. It also provided that the Fuquas and Palmer would be limited partners and that Beck would be the general partner. The addendum was not signed by the Fuquas. ⁷

Early in June of 1976, a lease broker submitted to Beck and Capitol Resources a group of five leases covering 950 acres, referred to as the $135,000 package of leases. One of the leases was the Ritchie lease. ⁸ On June 11, 1976, Beck offered these to Palmer. There is conflicting testimony as to Palmer's response. Defendants contend that Palmer refused these leases and that Beck subsequently contacted the Fuquas about the package of leases. J. B. Fuqua accepted and forwarded the funds ($135,000), with explicit instructions that these leases were to be acquired for Fuqua alone. Of the original five leases proposed, only three were actually acquired. The Ritchie lease was not acquired at that time, apparently due to the owner's refusal to deal with Beck. Palmer, on the other hand, contends that he believed the $135,000 package of leases was to be acquired for the partnership, that he offered to buy the leases in his own name until the partnership was formalized, but that Beck's son (and later Beck himself) refused his offer. ⁹ Shortly afterward, the Fuquas discovered that much of the money they had advanced to Beck had disappeared. Moreover, Atlanta Limited No. 2 had not been qualified as a limited partnership, thus exposing the Fuquas and Palmer to liability for debts incurred by Beck. Beck's management of the oil and gas properties was terminated by the Fuquas in July 1976, and Hytech Energy Corporation was employed to manage the properties. In addition, Beck, J. B., and J. Rex Fuqua entered into a settlement agreement providing that: (1) Atlanta Limited No. 1 would be dissolved and all assets thereof would be conveyed to the Fuquas, (2) the Fuquas would assume all liabilities in connection with Atlanta Limited No. 1, (3) Beck would resign as general partner of Atlanta Limited No. 2 and would transfer his interest therein to the Fuquas and Palmer, (4) the partnership would assume all of Beck's liabilities incurred in connection with Atlanta Limited No. 2, and (5) the parties would cancel and release all claims against each other arising out of any prior business relationship between them.

On July 7, 1976, Palmer met with Beck and several others in San Antonio in an attempt to settle the confusion surrounding the financial and administrative affairs of the anticipated partnership. The Fuquas were not present at this meeting. Defendants contend that at this meeting Palmer was informed that the $135,000 package of leases was being acquired by Fuqua for his individual interest. The next day, July 8, 1976, J. B. Fuqua met with Palmer in Atlanta. Fuqua alleges that at that time he reminded Palmer that the package of leases was being acquired by J. B. Fuqua individually and not for the partnership. Palmer states that he told the Fuquas at that time that he understood the leases were being acquired for the partnership. Both of these meetings were recorded by Palmer and the tapes of the meetings were introduced at trial. ¹⁰

Beck, Palmer, and the Fuquas entered into an amendment to the partnership agreement, which was dated July 8, 1976, whereby Beck was replaced as general partner by J. B. Fuqua. This agreement was signed by the Fuquas on July 8, 1976, and by Palmer on July 13, 1976. On July 14, 1976, J. B. Fuqua filed the certificate of limited partnership with the Secretary of State. Pursuant to the settlement agreement between the Fuquas and Beck, Beck caused all of the Atlanta Limited No. 2 leases held by him and Capitol Resources to be assigned to Atlanta Limited No. 2. On August 20, 1976, the Beever Brothers lease was assigned to J. B. Fuqua. On the same day, Fuqua assigned the lease to Atlanta Limited No. 2. To date, three wells have been drilled on the Beever Brothers property, and this lease has proved to be the most profitable asset owned by the partnership.

On October 22, 1976, the Ritchie lease was finally acquired by J. B. Fuqua. Upon acquisition of the lease, J. B. Fuqua assigned an undivided one-third interest therein to J. Rex Fuqua. The Ritchie lease covers approximately 315 acres of land, and is divided into four separate, fragmented, and noncontiguous tracts. ¹¹ The Fuquas individually drilled three wells on the Ritchie lease between November of 1976 and April of 1977. ¹²

Between January and September of 1977, the parties engaged in protracted correspondence. Palmer wrote to Hytech on February 16, 1977, asking to be "informed as to any present or proposed drill operations contiguous or adjacent to Atlanta No. 2 properties." That letter touched off inquiries within Hytech resulting in the so-called "Lacy letters," in which Jim Lacy, the President of Hytech, volunteered the opinion that at least one portion of the Ritchie lease would be within the area of interest owned by the partnership. These letters were introduced at trial solely for the purpose of showing bad faith on the part of the defendants. Palmer finally demanded that Fuqua transfer to him a one-sixth interest in the Ritchie lease in exchange for the payment by him of one-sixth of the cost of acquisition, development, and operation. The Fuquas refused unless Palmer would participate in the drilling program for the entire $135,000 block of leases, which Palmer refused to do. This litigation resulted.

Palmer, as trustee for the Oscar and Corinne...