Cumberland Oil Corp. v. Thropp
| Decision Date | 30 May 1986 |
| Docket Number | No. 709,D,709 |
| Citation | 791 F.2d 1037 |
| Parties | CUMBERLAND OIL CORPORATION and Sugargrove, Ltd., Plaintiffs-Appellants, v. James THROPP, Gregory Thropp, Arrowhead Gas Producers, Inc., and Southern Tier, Ltd., Defendants-Appellees. ocket 85-7855. |
| Court | U.S. Court of Appeals — Second Circuit |
Robert L. Beck, Rochester, N.Y. (Sutton, DeLeeuw, Clark & Darcy, Rochester, N.Y., of counsel), for plaintiffs-appellants.
David Rothenberg, Rochester, N.Y. (Geiger & Rothenberg, Rochester, N.Y., of counsel), for defendants-appellees.
Before MANSFIELD, MESKILL and PIERCE, Circuit Judges.
This is an appeal from a judgment of the United States District Court for the Western District of New York, Telesca, J., granting summary judgment and dismissing an action for fraud against persons associated with a bankrupt corporation. The district court granted summary judgment to the defendants under Mitchell Excavators, Inc. v. Mitchell, 734 F.2d 129 (2d Cir.1984). Because of the district court's reliance on Mitchell, we assume that the court viewed the instant cause of action as property of the bankruptcy estate under 11 U.S.C. Sec. 541 (1982).
We hold that the cause of action for fraudulent inducement of contract was not property of the bankruptcy estate under Mitchell. We affirm the grant of summary judgment, however, because the plaintiffs-appellants failed to rebut the affidavits and depositions filed in support of the defendant-appellees' motion for summary judgment. The motion claimed the absence of injury flowing proximately from the alleged misrepresentations, an essential element of the fraud claim.
This disposition requires us to set out the facts in some detail. In doing so we rely, of course, on the complaint and on the affidavits and exhibits in support of the cross-motions for summary judgment.
Cumberland Oil Corporation (Cumberland) and Sugargrove, Ltd., a limited partnership, are both organized under Georgia law. In 1980 Cumberland was investigating the possibility of diversifying its operations by investing in gas wells. Gregory Thropp was the president and sole shareholder of a now-defunct corporation named Benchmark Oil (Benchmark). In early 1980 Benchmark was in the business of acquiring oil and gas properties, drilling oil and gas wells and operating gas wells. James Thropp, Gregory's father, was not an officer of Benchmark but apparently was "a big guy in the oil and gas business in the area" around Olean, New York. Thrasher Dep. at 30. James and Gregory Thropp are New York residents.
In February 1980 Cumberland's president, J. Robert Murray, Cumberland's lawyer, H. Grady Thrasher III, and several others met with Gregory Thropp in Benchmark's office in Olean, New York. The purpose of the meeting was for the Cumberland representatives to investigate Cumberland's entry into the gas business. Cumberland's consultant on the venture, Richard Beutel, had recommended Benchmark as a potential contractor to drill and operate the wells for Cumberland.
Attorney Thrasher accompanied Murray to the meeting with Gregory Thropp. Although Cumberland was "basically preconditioned to accepting" Benchmark as the driller of its wells, Thrasher Dep. at 14, Thrasher asked Thropp for recent financial On March 22, 1980 Benchmark and Cumberland executed a "Drilling and Development Agreement" in which Benchmark agreed to drill up to three wells. Cumberland agreed to pay a "turnkey price" for each well and Benchmark was to drill the well "to such depth as is, in the opinion of the qualified geologist or petroleum engineer employed by Cumberland, adequate to properly test the ... formation," Complaint, Ex. A, p 3(a). The contract provided for each well to be tested before Benchmark was paid for the well and before it undertook to drill the succeeding well. Id. at p 3(a)-(c). 2
information on Benchmark. The purpose of doing so was "to make sure that they didn't have creditors filing liens against them or that ... they were[n't] on the edge of financial collapse because once you turn that money over to them, then it's up to them to deliver and perform under the contract." Id. at 15. According to Thrasher, Thropp replied that he would not disclose financial information and then "in an almost indignant way, he said basically rest assured that we are very capable of doing the job, and we are in ... excellent financial shape, and we have been in the Olean area for years and, you know, have always lived up to our financial commitments." Id. 1
Cumberland had a side agreement with its engineering consultant's firm that specifically referred to the three wells and provided that when Cumberland requested, the firm would furnish "supervision of field operations concerned with the drilling and operation of the wells, engineering supervision during well completion, engineering studies" and other services, J.App. at 36.
Benchmark drilled the three wells and Cumberland paid for them. When problems developed in drilling one of the wells, Benchmark redrilled it. Yet, despite these efforts, only the last of the three wells ultimately produced gas in commercially salable quantities; this well produced ninety percent of the gas produced by the three wells.
The parties do not dispute that water intruding into two of the wells reduced the amount of gas that could come up through the wells. Cumberland claims that the intrusion of water was caused by "fracturing" the wells at the wrong depth and by leaving acid in the well holes too long. 3
Between March and October 1980 Benchmark drilled nineteen wells in addition to the three wells drilled for Cumberland.
Gregory Thropp's representation that Benchmark was in good financial shape was either incorrect in February 1980 or was soon to become so. Circumstances changed substantially before Benchmark and Cumberland signed their contract in During the spring and summer of 1980 the Thropps carried out a series of transactions involving the establishment of new corporations and the transfer of assets in and out of those corporations. It is unclear from the record to what extent these transactions involved the misappropriation or fraudulent conveyance of Benchmark assets. It does not appear that Gregory Thropp ever admitted liability for misappropriation or fraudulent conveyance of Benchmark assets. These transactions are relevant here only to the extent that they support Cumberland's charge that the Thropps had a "plan" and a conspiracy to defraud Cumberland by inducing it to enter into a contract with a business that had effectively ceased to exist.
March 1980. In late February Benchmark assigned some of its royalty rights to the Thropps. The record is silent as to what Benchmark received in return. On March 21, 1980 Benchmark sold its land department for $100,000 to a corporation owned by the Thropps. On March 24, 1980 Benchmark assigned 2,542 acres of land to Gregory Thropp for $7,266.50, Benchmark's purchase price. These transactions stripped Benchmark of valuable assets.
On October 20, 1980, after the three Cumberland wells were drilled, one of Benchmark's creditors served it with a petition of involuntary bankruptcy. Cumberland learned of this development and removed Benchmark as the operator of the three wells.
A Benchmark creditor, Monroe Resources, Inc., sued the Thropps in New York state court in pleadings dated October 9, 1981. The Monroe Resources complaint pled causes of action for misrepresentation, breach of contract and negligence. That action was settled and, to avoid the consequences of a preferential transfer, the settlement was conditioned upon Benchmark's paying in full all creditors whose claims had been filed with the bankruptcy court. Cumberland was not among these creditors.
Although Cumberland had notice of Benchmark's bankruptcy, it did not file a claim in bankruptcy court for breach of contract or negligence against Benchmark, presumably because the limitations period for filing claims under Bankruptcy Rule 3002 had expired. See Bankr.R. 3002(c); Br. of Plaintiffs-Appellants at 4; J.App. at 294, 302. See also In re Sullivan, 36 B.R. 771, 772 (Bkrtcy.E.D.N.Y.1984). 4
The settlement in the Monroe Resources case was specifically approved by the bankruptcy court on November 17, 1982. Benchmark's bankruptcy trustee had also filed an action in the bankruptcy court against the Thropps and their corporations for fraudulent transfers. She received authority to compromise that case and the action was later dismissed.
Cumberland consulted with Monroe Resources' attorney as early as January 1982 about pursuing a common law remedy for fraud against the Thropps. Cumberland and the attorney agreed that he would "try to help" Cumberland as soon as the settlement check in the Monroe Resources case cleared. J.App. at 312.
On May 5, 1983, two days after Benchmark's creditors were paid dollar for dollar on their timely claims, Cumberland filed a complaint against James Thropp, Gregory Thropp and their corporations alleging causes of action for fraud, breach of contract and negligence. The Thropps moved to dismiss the complaint. The district court held that Cumberland stated a cause of action for fraud against Gregory Thropp but dismissed the contract and negligence claims as to all defendants. It dismissed the fraud claim against James Thropp and Cumberland's Second Amended Complaint stated claims for fraud against James Thropp and Gregory Thropp as principals in a "conspiracy to defraud the plaintiffs." J.App. at 69 p 16. The complaint stated that Benchmark was obligated "to provide the proper men, equipment and materials to perform the [Cumberland] contract in a good and workmanlike manner." Id. at 42 p 24. The complaint went on to allege that due to the "stripping of Benchmark assets in March of 1980,...
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