Barnett Oil & Gas Co. v. New Martinsville Oil Co.

• Decision Date: 20 December 1918
• Docket Number: 43.
• Court: U.S. District Court — Northern District of West Virginia
• Parties: BARNETT OIL & GAS CO. v. NEW MARTINSVILLE OIL CO.

254 F. 481

BARNETT OIL & GAS CO. v. NEW MARTINSVILLE OIL CO.

No. 43.

United States District Court, N.D. West Virginia.

December 20, 1918

John A Howard and Jas. M. Ritz, both of Wheeling, W. Va., for plaintiff.

Robert McV. Drane, of Piedmont, W. Va., Osman E. Swartz, of Fairmont, W. Va., and E. Bryan Templeman, of Clarksburg, W Va., for defendant.

DAYTON District Judge.

This case has been submitted for final hearing after all the evidence has been taken in open court and time given counsel to file briefs. Such briefs have been filed, and they, as well as the ones filed in relation to the preliminary motions heretofore made in the cause, have been most carefully considered. I have already filed two memorandum opinions as to the disposition of these preliminary motions.

The contention arising in this case grows out of the sale made by the defendant to the plaintiff of an oil lease in Wetzel county, this state, known as the Morgan lease. The plaintiff claims that this sale was effected by and through the effort of W. T. Robinson. Plaintiff contends he was acting as the agent for defendant in effecting this sale. Defendant denies this agency. Plaintiff further contends that Robinson induced Barnett, acting as agent for and in its behalf, to make the contract of purchase by gross fraud and misrepresentation. The defendant denies this, and in addition insists that, if fraudulent and false misrepresentations were made by Robinson in securing the contract, afterwards, after it had been fully informed of such the plaintiff ratified it, secured additional contracts, in which the times of payment were changed and extended, instead of repudiating the contract promptly on discovery of its condition and value, and the falsity of Robinson's representations of it, whereby it is estopped from further remedy on account of such fraud and misrepresentation, if any there were.

There is no question as to the change of the terms and conditions of the contract after the plaintiff was informed of the true oil and gas yielding production from the wells situate on the lease. In fact, the whole character of the original contract was changed. This original contract bore date February 29 1916. By its terms Barnett undertook for $350,000 to purchase all the capital stock of the defendant company, for which he was to pay $10,000 March 4, 1916, and $10,000 on Saturday of each week thereafter until the whole purchase price was paid. If a default of seven days was made in any payment, he was to forfeit all previous payments made to the New Martinsville Oil Company, and the stock certificates for the stock were to be returned to its stockholders, from whom they had been obtained. The stock certificates of defendant, indorsed in blank, so as to properly transfer them, were to be delivered to Robinson as trustee for the New Martinsville Oil Company, and he was to deposit them in the West Virginia Bank at Clarksburg in escrow, and in his name, to be turned over to Barnett only when all payments had been made. In the meantime, while the management and control of the property was to pass immediately to Barnett, no oil produced by the property was to be sold, except by consent, and if Barnett defaulted in any payments this oil was to belong and go to the New Martinsville Company, as well as all sums that had been paid. This contract was executed solely by J. W. Barnett, W. T. Robinson and A. R. Stallings.

On March 7th following it was modified by an agreement, signed only by the same three parties, to the effect that if Robinson and Stallings could not secure all the stock, but could deliver more than 60 per cent. of it, Barnett was to take and pay for the same at a proportionate rate of $350,000 for the whole. Barnett paid, under this contract, a total sum of $25,000. That Barnett was in fact acting for the plaintiff, the Barnett Oil & Gas Company, is not denied. He, C. W. Barnett, and L. M. Stephens were the leading organizers of that company, and it seems, immediately after this contract was signed, proceeded to advertise, in connection with Clark, a New York broker, its stock for sale, asserting and setting forth that it owned, among other property, this Morgan lease, having a settled daily production of 255 barrels of oil per day, and did sell enough thereof to realize the sum of $25,000, which was paid as above stated upon this contract.

It is claimed by plaintiff that these representations were made by Stephens and Clark, the broker, in good faith, upon the representations made by Robinson to Barnett and Stephens; that upon consultation with counsel they discovered and realized that they, under the contract, had in fact no direct right nor title whatever to this Morgan lease; that their purchase was solely that of the stock of the New Martinsville corporation, and that by failure to meet the weekly payments this stock could be withdrawn and their payments forfeited; that for this to occur would involve them in disgrace, financial embarrassment, and possibly subject them to criminal prosecution. Howard, their attorney, undertook to relieve this grave and serious condition. He secured a meeting of the stockholders to be had on April 24, 1916, at which time an agreement was arrived at whereby the property, real and personal, of the defendant, instead of its stock, was to be transferred and sold to the plaintiff corporation, and this agreement was subsequently incorporated in a contract of sale under date of May 2, 1916, executed by the defendant corporation to the plaintiff, and secured by a deed of trust the same day upon the property, executed by the plaintiff company to Dyer, trustee. By these instruments, after allowing credits for payments made, and after assuming a balance of $34,600 due to Robinson and Stallings from the defendant for their services in making the sale, and a cash payment of over $40,000 was made, a balance of $255,400 was ascertained to be due from plaintiff and was secured by the deed of trust.

In the meantime the operation of the wells had been under the control of Culp as manager of the plaintiff, but the oil produced had been run into the pipe lines and the run tickets had been sent to McFarlane, the defendant's treasurer. Culp had reported to Barnett that he had been deceived in the producing capacity of the wells, but to what extent had not been set forth, and Barnett about this time disposed of his interests in plaintiff company, resigned his office of president and his directorship, and no investigation of the extent of the deception was made by him. The run tickets were asked for, at or about the time of this May meeting, of McFarlane, who promised to send them to plaintiff's attorney and subsequently he did send them. In September following still another meeting between representatives of the plaintiff and officers and stockholders of defendant was held at Cumberland, Md. At this meeting, it seems, the failure in production was quite vigorously discussed, and demands made for rescission or readjustment of the contract. The defendant refused any other settlement than one involving extension of time and modification of the number and amounts of payment, and the result was the release of the old deed of trust, the execution of a new one to secure a balance, $185,400, upon this Morgan lease and other property owned by plaintiff. This trust was executed October 1, 1916. It was expressly provided that none of the wells should be shot, except by consent of defendant.

In June (apparently the 19th), 1917, a conference was had between the attorneys and some of the officers of these companies, the result of which was that on the 22d a check was sent by plaintiff's treasurer for $5,000 to the attorney for the defendant, with a letter setting forth what its writer understood had been agreed upon, among other things that plaintiff should have permission to shoot any of the wells in such manner as good practice warranted, and was to be granted permission to surrender any of the Culp leases (covered by the deed of trust), other than the Morgan one, unproductive and causing outlay in the payment of rentals, and in case the debt in full was paid on or before October 1, 1917, a deduction of $40,000 of the contract price should be made. This proposition was rejected, and the defendant proceeded at once to cause advertisement of sale under the deed of trust to be made.

Thereupon this bill was filed, and upon notice and hearing had Circuit Judge Pritchard awarded a restraining order, afterwards continued by my order. The bill in effect charges that during all these 15 months from March, 1916, to June, 1917, when these proceedings were had, the plaintiff's officers were laboring under the oppressive fear of the disastrous results that would arise from litigation and exposure of the untrue representations made by them, in the sale of stock, solely by reason of their faith in Robinson and his misrepresentations; that the defendant and its officers knew this, and took advantage of it to enforce a fraudulently procured and grossly unjust and outrageous contract; that the wells never did have a settled production of 255 barrels per day, or more than a third of it; that not until November, 1916, did any opportunity offer for any relief from this embarrassing condition; that then certain of its officers, by purchase with their own funds, secured and transferred to their company additional properties which turned out to be valuable, and, at the time of filing the bill in July, 1917, had been so productive as to put the company upon a sound and substantial basis, so that it could, without fear, assert its determination to resist the defendant's oppressive demands.

The first question that arises is: Was Robinson acting as agent for the...