Deep Oil Development Co. v. Cox

• Decision Date: 14 October 1949
• Docket Number: No. 15055.,15055.
• Citation: 224 S.W.2d 312
• Parties: DEEP OIL DEVELOPMENT CO. et al. v. COX et al.
• Court: Texas Court of Appeals

224 S.W.2d 312

DEEP OIL DEVELOPMENT CO. et al. v. COX et al.

No. 15055.

Court of Civil Appeals of Texas. Fort Worth.

October 14, 1949.

Rehearing Denied November 18, 1949.

COPYRIGHT MATERIAL OMITTED

James W. Harvey, Archer City, James N. Ludlum, Fort Worth, William N. Sands, Fort Worth, Stine & Stine and Vincent Stine, Henrietta, for appellants.

Nelson, Montgomery & Robertson, Wichita Falls, Kilgore & Kilgore and Jno. E. Kilgore, Dallas, for appellees.

McDONALD, Chief Justice.

The purpose of this suit is to impress a constructive trust upon an eighty acre oil lease in Archer County on the theory that a director of a corporation purchased the lease for himself after having been directed to purchase it for the corporation. The corporation has been dissolved since the date of the purchase, and the suit is maintained by the dissolved corporation by and through its officers and directors, by certain stockholders for themselves and all the other stockholders, and by certain other interested parties. The defendants are the director who acquired the lease, two other persons to whom interests in the lease were transferred, and the former president of the corporation. Plaintiffs offer to do equity by paying to defendants, the appellees, such amounts as they have expended in the purchase and development of the lease. Damages are sought in the alternative.

Deep Oil Development Company, the corporation in question, was engaged in the oil producing business at the times material herein. L. F. Cox was its superintendent of production and a director in the company. Cox was also engaged in the oil business on his own account, with the consent and approval of the Deep Oil Development Company. It was Cox's custom, when he found oil properties for sale that he considered would be desirable properties for Deep Oil to own, to bring such properties to the attention of the company before making any effort to acquire them for himself. Prior to August 29, 1947, Cox learned that a certain eighty acre lease, which we shall refer to as the Wilson lease, could be bought for $32,000, $12,000 in cash and $20,000 payable out of oil. He thought that the lease was a good one, and asked the secretary of the company to call a meeting of the board of directors to consider the matter. Five of the seven member board met in a special meeting on August 29, 1947, Cox recommended the purchase of the lease, and by resolution unanimously adopted, the board authorized the purchase. On the same day Cox obtained from the owner of the lease an oral agreement to sell it to the company on the terms aforesaid.

John W. Thomas was the president and general manager of the company. He was away on a vacation at the time of the board meeting just mentioned, but returned and on September 2nd learned of the plans to buy the Wilson lease. On that day he told Cox that the company would not go through with the deal and said that he would call on the directors to rescind their action of August 29th. Later he told Cox that a majority of the board had agreed with him not to buy the lease. Cox said that he had committed the company to buy it, whereupon Thomas asked Cox why he did not buy it himself. Cox replied that he did not have the money available. Thomas told Cox that he would lend him the $12,000. On September 5th Thomas sent his personal check for $12,000 to the owner of the lease, and transfer of the lease was made to Cox. Cox gave Thomas his note for the $12,000.

In the latter part of October Cox sold a half interest in the lease to Thomas' two children. Thomas represented his children, who were adults, in the purchase from Cox.

In December Cox drilled a producing well on the lease, other wells followed, and the jury found that the lease was worth $750,000 at the time of trial.

Viewing the evidence in the light most favorable to the verdict, it shows that a majority of the stockholders of Deep Oil had decided, prior to August 29, 1947, that it would be to the best interest of the stockholders to bring an end to the business of the company. They understood that the federal income taxes would be less if they would sell their stock in the corporation than they would be if the corporation should sell its properties and divide the proceeds among the stockholders. With the consent of the majority in interest of the stockholders, although it appears that on advice of counsel they were careful not to take any concerted action in the matter that could be regarded as an act of the corporation, Thomas negotiated with several prospective purchasers. The evidence shows that in all of such negotiations he was undertaking to find a purchaser who would buy the stock of all who wished to sell.

Due to the size and complexity of the business, affairs and properties of the corporation, a thorough estimate of the value of the stock could be made only after an examination of the company's properties that would involve an expenditure of a considerable amount of time and money. The evidence shows that it was customary in such a situation for the seller to agree not to disturb, at least to any material degree, the capital structure of the company while an appraisal was being made by a prospective purchaser, and Thomas testified that he committed himself to such purchasers not to buy new properties, sell old properties, or otherwise change the capital structure during such period of investigation.

Prior to August 29, 1947, conversations had taken place between Thomas and E. H. Eddleman looking toward a possible purchase of stock by Eddleman, and before he left on his vacation, several weeks prior to August 29th, Thomas instructed the secretary of the company to make all books and records of the company available for inspection by Eddleman. Thomas testified that he had an understanding with Eddleman that the capital structure would not be disturbed, etc., and Eddleman, although not agreeing that he and Thomas had such an understanding, testified that such a practice was customary in like situations.

It was because of the understandings just mentioned, Thomas told Cox, that the company would not go through with the purchase of the Wilson lease.

The case was submitted to the jury on 73 special issues. Some of the material findings of the jury are in effect as follows:

(1) It would have been beneficial to the company at all times from August 29th up to the time the first well was finished for the company to have acquired the lease.

(2) Cox did not know, when he acquired the lease from its owner, that the board of directors had not in a board meeting rescinded its action of August 29th, but had sufficient knowledge to put a prudent person on inquiry, which, if pursued with reasonable diligence, would have disclosed such fact.

(3) In September four named directors, including Thomas but excluding Cox, consented as individual directors to rescind the August 29th resolution, but believed at the time that it was to the best interest of the corporation to acquire such lease, and two of the four did not know that Cox would get the lease if the corporation did not take it.

(4) When Cox borrowed the $12,000 from Thomas and agreed to purchase the lease for himself he believed in good faith that he was acquiring good title to the lease.

No issues were submitted to the jury, nor requested, concerning Thomas' good faith in the matter, although the jury found that Thomas' two children believed in good faith that they were acquiring good title when they bought an interest in the lease and did not know that Deep Oil was claiming any interest. Nor were any issues submitted or requested inquiring if Cox and Thomas had agreed that Thomas or his children should have an interest in the lease.

After making an exhaustive investigation of the properties, business and affairs of the company, in which attorneys, certified accountants and others were employed, Eddleman agreed in October to purchase the stock of all who wished to sell, provided as many as eighty per cent would sell, and on November 19th and 20th completed purchases of 92 per cent of the 400,000 shares of stock at $4.10 per share.

On November 20th a special directors' meeting was held, which was attended by all of the directors of the company, and by Eddleman, Ford, Gay and Rogers, the latter four of whom were not then officers or directors. Thomas resigned and Eddleman was elected director and president. The other six directors tendered their resignations, but the resignations were not then acted upon and the meeting was postponed to November 25th. At the outset of the November 20th meeting the minutes of the August 29th meeting were read, which included the resolution authorizing the purchase of the Wilson lease.

On November 25th Eddleman and three other directors met. Resignations of all but one of the old directors were accepted, although two of them, Cox, and Coffey the secretary of the company, were reelected as directors. Mr. Humphrey, an old director, remained on the board, his resignation not having been accepted, and Gay, Ford and Rogers were elected as new directors. The new board was thus composed of Eddleman, Humphrey, Cox, Coffey, Gay, Ford and Rogers.

The jury also found in substance as follows:

(1) Eddleman had actual knowledge of the August 29th resolution on November 20th, and he failed to notify the defendants of any claims the plaintiffs might have within a reasonable time under all the facts known to him at that time.

(2) Eddleman had sufficient knowledge to put him on inquiry at the time he bought the stock in the company that the directors had passed the resolution of August 29th and that the company did not have apparent title to the lease.

(3) Eddleman did not within a reasonable time after he bought the stock advise any of the defendants that Deep Oil might claim the lease or an interest therein.

(4) Humphrey knew prior to November 25th that the lease had not been bought for the company but had been...