Beadle v. Daniels

• Decision Date: 17 May 1961
• Docket Number: No. 2972,2972
• Citation: 362 P.2d 128
• Parties: H. O. BEADLE and F. E. Mundell, Appellants (Defendants below), v. Walter E. DANIELS, on behalf of himself, and all other interest holders in the Cotton oil and gas lease upon lands in Weston County, Wyoming, Appellee (Plaintiff below).
• Court: Wyoming Supreme Court

Page 128

362 P.2d 128

H. O. BEADLE and F. E. Mundell, Appellants (Defendants below), v. Walter E. DANIELS, on behalf of himself, and all other interest holders in the Cotton oil and gas lease upon lands in Weston County, Wyoming, Appellee (Plaintiff below).

No. 2972.

Supreme Court of Wyoming.

May 17, 1961.

Beatrice Raymond, Newcastle, and Alan L. Austin (of Austin, Hinderaker & Hackett), Watertown, S. D., for appellants.

Thomas L. Whitley (of Halsey, Whitley, Hollaway & Liamos), Newcastle, for appellee.

Before BLUME, C. J., and PARKER, HARNSBERGER and McINTYRE, JJ.

Mr. Justice McINTYRE delivered the opinion of the court.

According to the undisputed evidence and party stipulations in this case, the plaintiff and other interest holders owned working participating interests in an oil and gas lease covering lands in Weston County, Wyoming, and known as the Cotton lease. The interests were sold by Progressive Drilling Company, a corporation, under separate but identical contracts called Contract for Conveyance of Interest in Oil and Gas Lease, and for Operation and Development Thereof. Said corporation was designated in each contract as the operator, and the interest purchaser was referred to as nonoperator. In general, the operator was vested with authority to perform all drilling and oil and gas operations with the provision that 'said Operator shall charge Non-operator with his proportionate share of the expenses and costs incurred thereon.' In addition there was a specific provision that if at any time a pumping unit is required, 'Operator shall charge Non-operator with his proportionate share of the expense and cost of such pumping unit.'

The need for a pumping unit for one of the wells arose. In order to supply it, the defendant F. E. Mundell, who was president of Progressive Drilling Company, and the defendant H. O. Beadle, who was executive vice-president thereof, found and purchased from an abandoned lease, at a sacrifice or very low price, considerable production equipment, including a pump jack and sucker rods which were needed for and which were used on the Cotton lease. Said pump jack and rods were supposedly sold to Progressive Drilling Company for said Cotton lease at a price of $6,400, being $5,000 for the jack and $1,400 for the rods.

The entire lot of equipment purchased by Mundell and Beadle cost them $5,600, including the cost of recovering it from the abandoned lease and hauling it. In addition to the portion used on the lease here involved, they either resold or themselves made use of considerable other equipment. If the materials used on the Cotton lease were valued at $6,400, they would have obtained $10,835 for all of the equipment.

It is claimed on behalf of defendants that the reasonable and fair market value of the material used on the Cotton lease was $6,400. Said defendants maintain that they had a right to sell this portion of the material to the Progressive Drilling Company at its market value of $6,400 and that such company in turn could charge interest holders in the Cotton lease on the basis of such a price. Appellee on the other hand contends, and the trial court so held, that defendants because of their fiduciary relationship toward the plaintiff and other interest holders could not profit from the transaction insofar as the Cotton lease material was concerned. There was no evidence that the matter of acquiring the material by Progressive Drilling Company from the defendants was ever considered, discussed or approved at a meeting of the board of directors or stockholders of said company. Rather, as the trial judge found, the negotiations and agreement for the purchase of the equipment were made and carried out by the defendants in a dual capacity, i. e., as officers and directors of the corporation in buying the material and as individuals or partners in selling it. No other persons were present. No record or entries were made in the corporate minute book reflecting the transaction.

The operating agreements here involved do not permit operator to charge for pumping equipment on the basis of its market value. According to each contract, operator was to charge nonoperator with his proportionate share of the expense and cost. That does not mean market value; it means that Progressive Drilling Company as operator was entitled to charge the actual cost only for the pump jack and sucker rods which were used on the Cotton lease. Mundell and Beadle were the chief executive officers of said company. It necessarily follows, therefore, that their actions in purchasing such pumping equipment and placing it on the Cotton lease were the actions of the corporation itself. They were agents of the corporation, and the corporation was agent for the interest holders.

This court has heretofore held that the directors of a corporation are its agents. In Nicholson v. Kingery, 37 Wyo. 299, 261 P. 122, 123-124, this was said:

'The directors of a corporation are its agents, and in their dealings with and for the corporation are held to the same strict rule of honesty and fair dealing between themselves and their principal as other agents. * * *

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'Since in this case the defendant directors offered no testimony to overcome the presumption of fraud imposed upon them by law from the fact that they were acting both for themselves and the Investors' Guaranty Corporation, we need go no farther than to hold that when it is shown by competent evidence that a director of a corporation acted both for himself and for the corporation * * * the burden of proof is cast upon him to show by clear, convincing evidence that the transaction was open, fair, and honestly made and that he did not profit by such sale to the disadvantage of the corporation.'

As agents then, it is clear that directors occupy a fiduciary relationship with regard to the corporation and persons represented by it. They stand in a position similar to that of a trustee, and it is a well-settled rule that such a trustee can make no profit out of his trust. Magruder v. Drury, 235 U.S. 106, 35 S.Ct. 77, 59 L.Ed. 151, 156; Young v. West Edmond Hunton Lime Unit, Okl., 275 P.2d 304, 3 Oil and Gas Reporter, p. 1736 (1954), appeal dismissed 359 U.S. 909, 75 S.Ct. 600, 99 L.Ed. 1245; Angelus Securities Corporation v. Ball, 20 Cal.App.2d 436, 67 P.2d 158; Elggren v. Woolley, 64 Utah 183, 228 P. 906; 13 Am.Jur. Corporations § 998, pp. 950-951 (1958); 19 C.J.S. Corporations § 786, pp. 161-162.

The rule precluding a director from deriving a profit from the corporate business is especially applicable where the corporation itself is a trustee. Chicago, Milwaukee & St. Paul Railway Company v. Des Moines Union Railway Company, 254 U.S. 196, 41 S.Ct. 81, 65 L.Ed. 219; H. B. Cartwright & Bro. v. United States Bank & Trust Co., 23 N.M. 82, 167 P. 436; 19 C.J.S. Corporations § 786, pp. 161, 164 (1940). In the instant case the defendants, because of their fiduciary relationship, are prohibited from selling at a profit that which they sell on their own account, especially since the transaction was carried out without the knowledge and consent of other parties concerned. They are not allowed to unite the two opposite characters of buyer and seller, because the interests are directly conflicting. Young v. West Edmond Hunton Lime Unit, supra; Michoud v. Girod, 4 How. 503, 45 U.S. 503, 11 L.Ed. 1076, 1099.

If, as we have said, the acts of the president and executive vice-president of the corporation, Progressive Drilling Company, are in this instance acts of the corporation itself, then the cost to them for the material in question must be held to be the cost to the corporation as operator. Counsel for the defendants complain that the entire transaction was involved and complicated and the exact cost cannot be ascertained. That, however, does not change the equities or permit a different basis of assessment to interest holders. The district court found that $5,600 including recovery expense and hauling was paid for all equipment purchased. It would have brought on resale or use $10,835, if the Cotton lease interest holders were left with a charge of $6,400. Thus, the total resale price would be composed of 51.68 per cent as cost and 48.32 per cent as profit.

Taking the position that defendants could profit on the material which was sold or used elsewhere but that they could not profit on the material used upon the Cotton lease, the trial court assumed that the $6,400 pretended charge, like the overall resale price, was also composed of 51.68 per cent cost and 48.32 per cent profit. The amount of this profit, $3,092.48, was considered an overcharge and judgment was given for plaintiff against the defendants for that amount. The formula is not exact. There is no way of telling to a certainty what portion of the overall material went into the Cotton lease and what portion went elsewhere. However, if we used a different formula, the result would be substantially the same. In the absence of another formula being suggested by defendants for fixing the cost to them of the Cotton lease material, we approve the one used as being fair and equitable.

Taking the position as we do that the respective operating agreements are controlling and that the interest holders can be charged only on the basis of actual cost for production material, it becomes unnecessary to consider appellants' suggestion that said agreements created a mining partnership and that a partner may sell property to the partnership for a fair market price.

The action in the case at bar was commenced a little less than four years after the cause of action arose. The defendants contend this period of delay in bringing the action was unreasonable under the doctrine of laches and that plaintiff was estopped from maintaining the suit. The rule supported by the weight of authority is that delay in asserting a right does not of itself constitute laches. Other facts and circumstances must be...