Potlatch Oil & Refining Co. v. Ohio Oil Co.

• Decision Date: 03 December 1952
• Docket Number: No. 13010.,13010.
• Citation: 199 F.2d 766
• Parties: POTLATCH OIL & REFINING CO. et al. v. OHIO OIL CO.
• Court: U.S. Court of Appeals — Ninth Circuit

199 F.2d 766 (1952)

POTLATCH OIL & REFINING CO. et al. v. OHIO OIL CO.

No. 13010.

United States Court of Appeals Ninth Circuit.

October 30, 1952.

Rehearing Denied December 3, 1952.

E. J. McCabe, E. J. McCabe, Jr., Great Falls, Mont., for appellants.

Louis P. Donovan, Shelby, Mont., W. H. Everett and John W. Gee, Casper, Wyo., for appellee.

Before DENMAN, Chief Judge, and BONE and POPE, Circuit Judges.

POPE, Circuit Judge.

Appellants, plaintiffs below, brought this action to procure an accounting of amounts alleged to be due them from the appellee-defendant under the terms of a so-called "Operating Agreement". This agreement was executed June 15, 1922 by the trustees of a "common law trust" known as Troy-Sweetgrass Oil Syndicate, and the defendant Ohio Oil Company. On the same date the Syndicate assigned to Ohio Oil Company, here called Ohio, a 55 percent interest in certain oil and gas leases covering lands in Toole County, Montana. By the Operating Agreement Ohio undertook to develop the leased lands for oil and gas purposes. Ohio was to market all oil and gas produced and account to Syndicate for the latter's 45 percent of the proceeds remaining after deduction of royalty oil and gas.

The agreement contained the following provision, the meaning of which was the primary question raised by the complaint: "Ohio will pay all costs and expenses of developing and operating said lands for oil and gas purposes, as herein provided, and shall charge the said party of the first part Forty-five (45%) percent thereof." Included in the "costs", a share of which were charged by Ohio under the quoted clause, were the following disputed items: the expense of a water plant, an overhead charge of ten percent, automobile expense, and the cost of constructing a camp.

In January, 1923, the Syndicate assigned half of its then interest in the leases and the Operating Agreement to another "common law trust" — Inland Empire Oil and Gas Syndicate — here called Inland. Again, on August 18, 1923, Syndicate assigned its remaining half interest to Potlatch Oil and Refining Company, a corporation, here called Potlatch.

By the early part of August, 1925 controversy had developed between Inland and Potlatch, on the one hand, and Ohio on the other, with respect to the manner in which Ohio was charging its costs of operation and accounting for the oil produced. In an effort to adjust and settle the dispute the parties had a conference at Shelby, Montana, on August 7, 1925 as a result of which it was agreed that the attorneys for Inland and Potlatch would reduce to writing and send to Ohio a statement of the items giving rise to the difference of opinion between the parties, and stating the objections of Inland and Potlatch to the accounts theretofore rendered.

Pursuant to that understanding the attorneys did under date of August 8, 1925 write such a letter to Ohio. The position taken in the letter was that the only charges authorized by the Operating Agreement "were simply the charges and expenses incurred within the four corners of the lease". It was asserted that the conversations between the parties prior to the signing of the agreement were to the effect that "there should be no charge * * * save and except the actual expense incurred on the lease itself". Particular objection was made to the items of cost above mentioned, and it was also asserted that Inland and Potlatch should have been credited with an additional 10¢ per barrel on the oil sold. Complaint was also made that drilling and other related costs had been excessive. The letter recited that the attorneys believed that it covered all points of dispute. In general it set forth the same matters which form the basis for the complaint in the action now before us.

On September 12, 1925 Ohio replied to this letter, item by item, explaining in considerable detail the views of Ohio with respect to each of them. The reply took the position that the charges as made were correct, that the oil had been properly accounted for and that the drilling costs were not excessive. In general the letter rejected all of the claims made. Thereafter Ohio continued to make the same kind of charges for the same items and to account for the oil in the same manner in which it had previously done until about January 31, 1943 when Ohio sold its interest in the leases to the Texas Company. On March 18, 1947 Potlatch and the Trustees of Inland filed their complaint in this action in the District Court of Toole County, Montana. The action was removed to the court below on the ground of the diversity of citizenship of the parties.

In its answer Ohio urged, among other defenses asserted, that the action was barred by laches and by the Montana statute of limitations. Ohio had judgment, the trial court sustaining several of its defenses including those of laches and the bar of the statute of limitations.

The complaint sets out the Operating Agreement by annexing it as an exhibit. It alleges that before the Operating Agreement was reduced to writing, there was an oral understanding that the agreement should provide that the costs to be charged against the share of Troy Sweetgrass Oil Syndicate, assignor of the plaintiffs, would be restricted and limited exclusively to the cost of the actual drilling of the wells at their locations on the lands plus the actual cost of the equipment located upon the lands and the actual cost of its installation, repairs and replacement; and that all other costs would be the sole expense of and chargeable to Ohio. It alleges that Ohio promised to reduce the terms of such oral agreement to writing; that it represented that a certain clause of the written agreement had accomplished the limitation of costs which had been agreed upon orally, and that plaintiffs' assignor, the Syndicate, executed the agreement in reliance thereon and believing that the costs had been limited and restricted in accordance with the oral understanding. The complaint further alleges that Ohio, contrary to the agreement of the parties and to the provisions of the Operating Agreement, had improperly charged the plaintiffs' shares with items of cost and expense aside and apart from the actual cost of drilling and installing equipment upon the land itself, and that it had failed to make proper accounting of the oil sold. It alleges that defendant's attention had been called to the erroneous charges and credits mentioned; that defendant expressly promised that these would be rectified upon a correct and full final accounting to be made later; and that a true and correct accounting would disclose that a sum in excess of $175,000 was due to each of plaintiffs. The prayer was that defendant be required to render a full and true accounting under the Operating Agreement and upon such accounting it be ordered to pay the plaintiffs the sums shown to be due thereon.

Appellants speak of their action as one "to obtain a judgment requiring the appellee to account to appellants for alleged moneys received and improperly withheld from appellants in connection with certain oil and gas agreements theretofore entered into between appellants and appellee and to pay the appellants the amount determined * * * on such accounting." It is not altogether clear whether appellants consider their action to be one upon a written contract to be construed in the light of the alleged prior oral negotiations, or whether it is an action upon a written agreement modified or supplemented by an oral agreement, or whether it is an action to reform the written contract and to recover upon the same as reformed. The opinion, D.C., 96 F.Supp. 685, of the trial judge refers to it as an action brought to reform the written agreement.

The Montana statutes of limitation provide that "An action upon any contract, obligation, or liability, founded upon an instrument in writing", must be commenced within eight years;¹ that "An action upon a contract, account, promise, not founded on an instrument in writing" must be brought within five years;² and that "An action for relief on the ground of fraud or mistake", must be brought within two years after discovery of the facts constituting the fraud or mistake.³

Since the appellants, through their attorneys, made their written statement of their claims with respect to Ohio's obligations in 1925, which claims were rejected at that time, and since the present suit, setting up substantially the same matters which were discussed in the August 7, 1925 letter, was not commenced until March 18, 1947, it would seem at first blush that no matter what the theory of the complaint, the action must have been barred by limitations as the trial court held. However, the appellants contend that the action is not so barred for the reason that it did not accrue until 1943 when Ohio sold out to the Texas Company.

Appellants assert that prior to that time Ohio on the one hand, and Inland and Potlatch on the other, were joint adventurers in that they were engaged in an enterprise for profit undertaken by them jointly. They argue that "the relations between joint adventurers is fiduciary and each has the right to demand and accept from their associates utmost good faith and scrupulous honesty in all that relates to their common interest and each is forbidden to so act that his personal interest would be hostile to the other. The relationship is in the nature of trusteeship." Hence, it is argued, where a fiduciary acquires more than his proper share under the agreement, "he will be deemed a trustee for the benefit of his co-adventurer."

It is argued that under the Operating Agreement Ohio, by reason of the confidence reposed in it by the Syndicate, was given possession and control of the lands and it thus became a fiduciary. As a fiduciary it occupied a relation of trusteeship owing the duty to account correctly and honestly.

The appellants contend that this trust continued throughout the period from 1925 to 1943 and...