Continental Supply Co. v. Marshall

• Decision Date: 23 January 1946
• Docket Number: No. 3057.,3057.
• Citation: 152 F.2d 300
• Parties: CONTINENTAL SUPPLY CO. v. MARSHALL et al.
• Court: U.S. Court of Appeals — Tenth Circuit

152 F.2d 300 (1945)

CONTINENTAL SUPPLY CO. v. MARSHALL et al.

No. 3057.

Circuit Court of Appeals, Tenth Circuit.

November 29, 1945.

Rehearing Denied January 23, 1946.

Roy C. Lytle, of Oklahoma, City, Okl. (D. I. Johnston, of Oklahoma City, Okl., on the brief), for appellant.

Mark Goode, of Shawnee, Okl. (John L. Goode, of Shawnee, Okl., on the brief), for appellee Federal National Bank.

Before PHILLIPS, HUXMAN, and MURRAH, Circuit Judges.

MURRAH, Circuit Judge.

This appeal primarily involves the relative rights of two mortgagees under their respective mortgages upon the mortgagor's undivided interest in certain oil and gas leases. The facts and judgment of the trial court are stated in its reported decision (D.C., 52 F.Supp. 717), but a restatement here is deemed essential to a proper understanding of the questions for review.

On July 23, 1941, the appellee, H. G. Marshall, as owner of an undivided 8/32nds of the 7/8ths working interest in two oil and gas leases (sufficiently described as the Pensoneau and Whitehead leases, located in Pottawatomie County, Oklahoma), executed and delivered to the appellee, The Federal National Bank of Shawnee, Oklahoma, two mortgages, identical in form, on these leases. Each of the mortgages was given to secure a note of even date in the sum of $20,000, and to secure all other indebtedness and liabilities of the mortgagor to the mortgagee then or thereafter existing, and however incurred, not to exceed $20,000, and also to secure all amounts which the mortgagee might become liable or obligated to pay on behalf of the mortgagor, whether by agreement or by operation of law, in order to protect its security. The note secured by the mortgage on the Pensoneau Lease was executed by Marshall as principal, and the note secured by the mortgage on the Whitehead Lease was endorsed by him for the Ideal Drilling Company, a wholly owned corporation.

Each of the mortgages covered the mortgagor's undivided interest in the respective leasehold estates and the "lease equipment" thereon. In addition thereto, the mortgages specifically covered and included all rents and proceeds derived from the leases, and the mortgagor agreed to execute all necessary assignments and division orders requisite to vest title to the same in the mortgagee during the life of the mortgages. Both instruments were recorded in Pottawatomie County as real estate mortgages, and were also filed as chattel mortgages, on the date of their execution. Contemporaneously and in accordance with the terms of the mortgages, the mortgagor executed division orders to the purchaser of the oil and gas from the leases, directing it to pay the proceeds of the oil and gas produced from his interest in the leasehold estates to the "Federal National Bank for H. G. Marshall", and from and after July 30, 1941 until November 30, 1942, the proceeds from the oil produced and sold were paid to the Bank in accordance with the division orders, and by it deposited to the checking account of Marshall, who paid the proportionate share of the operating costs to the operating partner on each of the leasehold estates.

On the following March 11, 1942, Marshall entered into a written agreement with appellant, Continental Supply Company, in which it was agreed that in consideration of Continental dismissing without prejudice certain litigation then pending against Marshall, and releasing certain securities held by it, Marshall would execute to the Continental his note dated January 2, 1942 in the sum of $47,137.31, due April 2, 1943. To secure the payment of this note, Marshall agreed to execute a real estate mortgage covering all of his 8/32nds interest in the Whitehead Lease, and one-half of his 8/32nds interest in the Pensoneau Lease, said mortgage to be subject to the two prior mortgages in favor of the Bank, covering all of Marshall's 8/32nds interest in each of these leases. The mortgage was also to include Marshall's 8/32nds interest in the Pecore Lease, also located in Pottawatomie County, but not included in the Bank's mortgages. Marshall represented that his total indebtedness to the Bank, secured by the Bank's prior mortgages, would not exceed $35,000, including interest; that he would not borrow additional funds from the Bank to be secured by its mortgages; that he would secure a letter from the Bank stating the exact balance due it with interest as of March 1, 1942, and agreeing that it would not lend Marshall additional sums to be secured by its present mortgages. He agreed to execute to Continental proper transfer orders covering its mortgaged interest in the oil and gas produced and sold, subject only to the prior mortgage indebtedness in favor of the Bank, and for which, as we have seen, transfer orders to the Bank had already been executed and delivered. When the prior indebtedness to the Bank had been discharged, Continental was to receive all of the runs from the interest covered by its mortgage, remitting to Marshall the operating expenses attributable to the Whitehead and Pecore leases. However, Marshall agreed to pay all of the operating expenses charged to his 8/32nds interest in the Pensoneau Lease (which produced substantially all of the income involved here), so that Continental's 4/32nds mortgaged interest would be equivalent to an overriding royalty, unburdened by any operating expenses. The contract also contemplated that Marshall might sell parts of his interest in the Pensoneau Lease, and Continental agreed to release its mortgage on any interest sold prior to May 16, 1942, provided the proceeds of such sale would be applied on the mortgage indebtedness to the Bank, or to its mortgage if the Bank had been paid.

Pursuant to this agreement, the note and mortgage were drafted, but when Marshall failed to procure the letter from the Bank stating the amount of his indebtedness as of March 1, 1942, and agreeing not to lend him any additional sums to be secured by the property included in its mortgages, this provision of the contract was stricken and the note and mortgage were finally executed by Marshall and duly acknowledged on March 26, 1942, effective as of January 2, 1942.

In a telephone conversation on the following March 31st, Continental informed the Bank of its mortgage, and of Marshall's agreement to obtain a letter from the Bank stating the amount of his indebtedness to it as of March 1, 1942, and agreeing that it would not increase its mortgage indebtedness to Marshall. Its President refused to commit the Bank concerning the statement or the agreement, and in a telephone conversation the following day (April 1st), the attorney for Continental again informed the Bank of Continental's second mortgage; again asked the Bank to render a statement of Marshall's indebtedness, and to agree not to make further advances under its mortgages. The Bank suggested that Continental send a letter containing the statement and proposed agreement for consideration, and on the same date, Continental mailed the letter to the Bank. Continental, apparently not having heard from the Bank, by letter of April 7, 1942, again informed the Bank of its agreement and second mortgage on the part of Marshall's leasehold estate, and asked for a balance of Marshall's indebtedness to the Bank. It informed the Bank that in accordance with its second mortgage, it would be required to contest "the priority of any additional funds which you might advance to Mr. Marshall." Acknowledging Continental's letter on April 9th, the Bank stated that if Marshall had given Continental a second mortgage on his interest in the oil and gas leases, and if Continental demanded that the Bank not make any further loans under its mortgages, it would have to "abide by your demands in this matter," but that such action would practically shut off Marshall's credit there, and further stated that it did not "feel at liberty" to inform Continental of Marshall's indebtedness without his consent.

On April 14, 1942, the mortgage, which had been previously executed and delivered to Continental on March 26, 1942, as altered in some immaterial respects by mutual agreement, was re-executed and duly recorded as a real estate mortgage on April 18, 1942 in Pottawatomie County. Two days after the re-execution of the mortgage and on April 16, 1942, with Marshall's permission, the Bank informed Continental by letter that Marshall's total indebtedness to it, both as endorser and otherwise, as of the close of business March 15, 1942, was $25,075.86, secured by mortgages on the Pensoneau and Whitehead leases.

Subsequent to the execution of the agreement between Marshall and Continental, but before the final execution and recordation of its mortgage, Marshall sold an undivided 1/32nds overriding interest in the Pensoneau Lease for $17,500. Both Continental and the Bank released this interest, and thereafter the Bank's mortgage covered an undivided 7/32nds interest in this lease, while Continental's mortgage, when finally executed and recorded, covered 3/32nds undivided interest in the same lease. In accordance with the Bank's mortgage and the division orders executed by Marshall pursuant thereto, the Bank continued to receive the checks for the oil runs from the 7/32nds interest in the Pensoneau Lease, and 8/32nds interest in the Whitehead Lease, and to deposit the same in Marshall's checking account. On September 1, 1942, Marshall sold an additional 2/32nds undivided interest in the Pensoneau Lease for a net sum of $24,000. The Bank released its mortgage on this interest, but Continental refused, and its mortgage on 3/32nds interest remained intact, so that effective September 1, 1942, Marshall owned, and the Bank's mortgage covered, 5/32nds undivided interest in the Pensoneau Lease, and Continental's mortgage continued to cover an undivided 3/32nds interest in the same lease. From September 1 to November 30, 1942, the Bank continued to receive the proceeds from the 5/32nds interest...