Backar v. Western States Producing Co.

• Decision Date: 24 February 1977
• Docket Number: No. 75-2182,75-2182
• Parties: Andre BACKAR, Plaintiff-Appellant Cross-Appellee, v. WESTERN STATES PRODUCING COMPANY (now Hytech Energy Corporation) and Wayman W. Buchanan, Defendants-Appellees Cross-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 876

547 F.2d 876

Andre BACKAR, Plaintiff-Appellant Cross-Appellee, v. WESTERN STATES PRODUCING COMPANY (now Hytech Energy

Corporation) and Wayman W. Buchanan,

Defendants-Appellees Cross-Appellants.

No. 75-2182.

United States Court of Appeals, Fifth Circuit.

Feb. 24, 1977.

Edward Kliewer, Jr., Stephen R. Anderton, Dallas, Tex., Ralph G. Langley, San Antonio, Tex., for plaintiff-appellant.

Michael Lowenberg, Dallas, Tex., for defendants-appellees.

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

Before MORGAN and GEE, Circuit Judges, and HUNTER, ^* District Judge.

GEE, Circuit Judge:

In this diversity action for breach of a written commission contract, Andre Backar, a citizen of New York, appeals from the final judgment of the district court against Western States Producing Company, a Texas corporation, and Wayman W. Buchanan, the President of Western States, and they cross appeal. Backar is a securities broker from New York. Western States is a Texas oil and gas production corporation engaged in drilling and production, and at the time of the relevant events, Wayman W. Buchanan was its president.

The Facts

Some years ago Western States was seeking investors for its drilling ventures and approached Backar, enlisting his services as a finder. The parties executed a letter agreement in New York on January 29, 1971, stating:

In consideration of your (Backar's) obtaining investors (whether persons, corporation, or organizations) for drilling funds managed by Western States Producing Company, or any other companies with which I am associated, each of the undersigned agrees that if any such investors, directly or indirectly obtained by you, ever participates in any drilling venture managed or controlled by Western States Producing Company or Wayman W. Buchanan, you will be paid your customary five percent (5%) commission for such moneys invested.

Buchanan executed the contract both individually and for Western States.

In February of 1971, Backar introduced Buchanan to Martin J. Fribush, the Executive Vice President of Comprehensive Resources Corporation (Comprehensive). ¹ After Buchanan and Fribush engaged in an animated discussion about Comprehensive's possible involvement in the financing of drilling operations, Buchanan executed the following memorandum:

This is to certify that I had lunch today with Andre Backar at the Marco Polo Club. He introduced me to Mr. Martin Fribush of Comprehensive Resources Corporation for the aim of doing business with him.

As per our letter of January 29, 1971, Mr. Backar is entitled to a finder's fee.

Later Comprehensive, acting either for its own account or as a general partner in various limited partnerships, entered into agreements with Western States for fifteen drilling ventures in Texas, New Mexico and Oklahoma. ² Cash investments made by Comprehensive individually or of funds of limited partnerships in which Comprehensive served as general partner aggregated $6,134,274. Backar recovered a five percent total commission on that amount in the trial court, and from this award Western States and Buchanan appeal. The trial court denied Backar recovery on the proceeds of several notes executed by Comprehensive in favor of Western States, without personal liability but secured by Comprehensive's interest in leases sold it by Western States. The proceeds of these notes amounted to $5,792,884.65. Plaintiff Backar appeals from the trial court's denial of a commission on these note proceeds.

Backar's Appeal

Understanding Backar's contention requires a grasp of the contractual arrangements in the drilling ventures. Because the fifteen separate drilling ventures engaged in by Comprehensive did not differ significantly, the parties agreed that one of their drilling agreements, "Program No. 30," would serve at trial as an example of how all agreements between Comprehensive and Western States functioned: under Program 30, Western States acquired an oil and gas lease, then sold 59% of it to Comprehensive. Comprehensive then executed a turnkey drilling agreement making Western States the operator of the lease. This agreement afforded Western States a reasonable profit on the drilling of the wells. The total "cost" to Comprehensive of its interest under Program 30 was $743,000. Of this, $445,000 was represented by cash paid to Western States by Comprehensive. The remaining $298,000 consisted of promissory notes executed by Comprehensive in favor of Western States, without personal liability but appropriately secured by its 59% interest in each lease. For brevity, we refer to these hereafter as nonrecourse notes. Pursuant to the loan, Comprehensive assigned to Western States a quarter of Comprehensive's 59% interest in the production from wells drilled under the agreement. Thus, Western States kept 41% of production from each lease and received an additional 14.75% (25% of 59%) by assignment.

A purpose of the Program 30-type arrangements was to place Comprehensive and its investors in position to take substantial tax deductions without risking more than the amount of cash paid for the leases. Under Program 30 itself, for example, Comprehensive "paid" $743,000 on paper and deducted that amount but turned over only $445,000 in cash to Western States. The other $298,000 was a capital wash: a loan from Western States to Comprehensive, returned by it to Western States to pay for the leases and for drilling. Because the notes were without maker liability, Western States could look only to proceeds of production from the leases for repayment. If the wells were successful, Western States received a substantial bonus because it held 25% of Comprehensive's 59% interest in production. If not, Western States took a bad-debt loss on the notes. Under Program 30 and the rest of the fifteen drilling ventures, Western States loaned out and received back, after production, a total of $5,792,884.65 in proceeds. Backar argues that this amount is to be viewed as "moneys invested" under the finder's fee contract and that he is therefore entitled to five percent of that amount.

Although the trial court found as a "fact" that the nonrecourse notes were not "moneys invested" under the terms of the letter agreement, the interpretation of a contract is usually a question of law. The basic facts underlying this determination are not disputed, only their legal effect, and we therefore review untrammelled by Rule 52(a)'s clearly erroneous standard. See Murphy v. Travelers Insurance Co., 534 F.2d 1155, 1162 n.7 (5th Cir. 1976); First National Bank v. Insurance Co. of North America, 495 F.2d 519, 522 (5th Cir. 1974). Even under this more relaxed standard of review, however, we conclude that the trial court correctly denied Backar a finder's fee on the proceeds of the nonrecourse notes.

The purpose of the finder's fee contract between Backar and Western States was to locate new capital to support Western States' drilling programs. Western States received no additional capital by the nonrecourse note transactions. ³ With them it paid no pushers and leased no rigs until such time as oil or gas production began, when it began drawing, in its own right, 25% of Comprehensive's production proceeds. For capital acquisition purposes, the transactions incorporating nonrecourse notes are essentially ones where Comprehensive bought only 44.25% of the lease. The parties to the finder's fee contract clearly contemplated "front money" that Western States could use to finance its drilling programs. The note transactions were meant to confect tax savings for Comprehensive and its investors, not to produce hard cash for drilling operations. Only after Western States had hit did it realize any injection of funds from them. The trial court was not in error when it concluded that the loan proceeds were not the "moneys invested" contemplated by the finder's fee contract. ⁴

The Cross-Appeal

In their cross-appeal, Western States and Buchanan contest Backar's right to sue for any finder's fee. In a ruling unchallenged here, the trial court held that New York law controls the litigation. See Backar v. Western States Producing Co., 382 F.Supp. 1170, 1173 (W.D.Tex.1974). New York real estate law bars suit by an unlicensed real estate broker to recover commissions on the sale or lease of real estate. ⁵ Western States asserts a conflict of laws argument: that because the drilling ventures necessarily involved the sale of oil and gas leases, real property under Texas, Oklahoma and New Mexico law, Backar met the New York definition of a real estate broker. ⁶ Backar is not licensed as a real estate broker, and thus Western States asserts that § 442-d, quoted at note 5 above, bars Backar's cause of action.

Before examining the merits of Western States' contention, we must determine if this affirmative defense was properly before the trial court when it granted its partial summary judgment against Western States. At no time did Western States formally plead § 442-d as an affirmative defense a serious omission, since in Funding Systems Leasing Corp. v. Pugh, 530 F.2d 91 (5th Cir. 1976), we held that an appellant cannot raise an unpleaded affirmative defense in a motion for summary judgment unless the motion for summary judgment is the initial pleading tendered by the party. 530 F.2d at 96.

Funding Systems is distinguishable, however, for there the party seeking to assert the affirmative defense on appeal appears to have been the only one aware at trial that the defense was sought to be put at issue. That trial court, in its findings of fact and conclusions of law, made no mention of the defense, and the appellant mentioned it only in his memorandum supporting the motion for summary judgment. By contrast, the parties in this case argued § 442-d before the trial court, and the trial court specifically ruled that § 442-d was before it. Moreover, plaintiff stipulated, on April 3, 1974, that the § 442-d...