Drilcon, Inc. v. Roil Energy Corp., Inc., 87-169
| Decision Date | 01 March 1988 |
| Docket Number | No. 87-169,87-169 |
| Parties | DRILCON, INC., Plaintiff and Respondent, v. ROIL ENERGY CORPORATION, INC., Clinton J. White, Shirley J. White, and Josephine R. White, Defendants and Appellants. |
| Court | Montana Supreme Court |
Murray, Kaufman, Vidal & Gordon, Daniel W. Hileman, Kalispell, Leaphart Law Firm, W. William Leaphart, argued, Helena, for defendants and appellants.
Scott & Tokerud, Keith Tokerud, argued, Great Falls, for plaintiff and respondent.
Roil Energy Corporation and Clinton J. White, appeal from a Flathead County District Court jury verdict awarding Drilcon, Inc., $1,577,595.20 in damages for breach of contract, negligence, and constructive fraud. All three causes of action arise out of a contract entered into by Drilcon and Roil for the purpose of drilling an oil well. The jury found that Roil breached its contract with Drilcon and held Clinton J. White, as President and alter ego of Roil Energy Corporation, personally liable for $809,023.20 in contractual damages by piercing Roil's corporate veil. The jury found White additionally liable for his negligence and constructive fraud in the amount of $768,595. Defendants Roil and White appeal the jury verdict. We affirm.
Val Holms incorporated Roil Energy Corporation in Montana in April of 1979. Roil did no business and was not capitalized at that time. Holms sold Roil to Clinton White in June of 1981 to cancel a $3,000 loan. Holms was unable to repay the loan and suggested that White "purchase" Roil for $3,000.
White's previous business experience includes involvement in several real estate developments and management of two credit bureaus. White testified that he bought the corporation to recoup his $3,000 loan to Holms and to protect himself from personal liability while he experimented with oil industry investments. White appointed himself president of Roil and designated his mother and wife as the other officers and directors. Holms held himself out as an assistant vice-president to potential investors. Roil was never capitalized.
In June of 1981, White negotiated and signed a "farm-out" agreement with Pennzoil Corporation whereby Roil was to drill an oil well on a Montana leasehold provided by Pennzoil. Roil was to bear all risk, cost, and expense of drilling the well in exchange for royalties in the event the well actually produced.
Holms then contacted Drilcon, a Texas corporation, and negotiated a day-work drilling contract. Under the terms of the contract, Roil was to pay Drilcon $6,500 per day to drill an oil well. Section 7 of the contract provided that a third party, Protea Capital Corporation of Dallas, Texas, would establish an escrow account in the amount of $459,553 and would pay Drilcon on a biweekly basis. The escrow was requested by Drilcon to guarantee payment because Drilcon was unfamiliar with Roil Energy Corporation.
On August 13, 1981, Drilcon forwarded the contract to White for his signature, but before White could sign, Protea backed out. Holms then secured another investor and arranged to have Sun Escrow of Palm Springs, California, replace Protea. Holms and an officer of Sun Escrow telephoned Drilcon with assurances that the escrow had been set up in a sufficient amount to cover Drilcon's estimated expenses for drilling the well. Sun gave written confirmation of the same in a telegram to Drilcon.
After receiving similar assurances from Holms and Sun, White, in his capacity as president of Roil, signed the original drilling contract on August 17, 1981. Neither party attempted to amend the contract to reflect the substitution of Sun Escrow for Protea Capital Corporation.
Drilcon began drilling on August 28, 1981, and submitted invoices to Sun on a timely basis. However, Sun made no payments on the first two invoices so Drilcon contacted Holms about the delay in payment. Holms professed no knowledge of the problem and promised to investigate. On September 21, 1981, Drilcon received notification that Sun Escrow could not pay because there were no funds in the escrow account. Drilcon again called Holms and received assurances that he would check the situation out and get back to them. After two days with no response from Holms, Drilcon ceased drilling at a depth of approximately 7,700 feet with expenses of approximately $204,000.
Holms again solicited the help of numerous potential outside investors and represented to Drilcon that funding was inevitable. Drilcon interviewed a number of these potential investors and believed that the funding would soon be forthcoming. In the meantime, Drilcon requested a written guaranty and a promissory note from Holms before it would resume drilling. Holms complied by sending Drilcon a telegram personally guaranteeing the cost of drilling on behalf of himself and Clinton White.
Holms immediately sent a copy of the telegram guaranty to White. White consulted his attorney about the telegram and was advised that Holms could not bind White with the guaranty. Shortly thereafter, White informed Drilcon that Holms' guaranty was unauthorized. Holms also gave Drilcon a security interest in certain oil properties and a financial statement listing his net worth at over $2.6 million. In fact, as Drilcon was to learn much later in preparing for litigation, Holms had a negative net worth at the time he gave his personal guaranty and he no longer had an interest in the oil properties.
At trial, the parties disagreed as to what Holms' relationship was with Roil. Holms represented to Drilcon and others that he was an assistant vice-president and testified to the same at trial. White disputes that Holms ever had authority to act in any official capacity for Roil. White specifically denied at trial that Holms ever had authority to guarantee anything on White's or Roil's behalf. However, White admits that he did not inform Drilcon that Holms was not a vice-president of Roil Energy.
Based on Holms' guaranty and representations, Drilcon resumed drilling in late September 1981 and eventually reached the 12,500 foot depth called for in the contract on December 2, 1981. White allowed Drilcon to resume drilling depite his knowledge that the escrow was not funded, that Holms' guarantee was worthless, and despite his own inability to guarantee costs. Tests indicated that the well would not produce. Shortly thereafter, Roil defaulted on its obligations to Pennzoil. Pennzoil had the well plugged on December 19, 1981.
A Drilcon representative testified his company believed that Roil, with the help of outside investors, would pay the costs of drilling or, alternatively, that Holms and White would pay. On December 31, 1981, Clinton White's attorney wrote to Drilcon and stated that Roil would be "unable to make the required payments for the drilling expenses incurred ... by virtue of the contract."
Drilcon sued Roil Energy in Texas on January 8, 1982, and obtained a default judgment for contract damages. The validity of the Texas judgment is questionable due to improper service of process. Drilcon also obtained judgments against Val Holms and Sun Escrow thereby prompting both to file bankruptcy. To date, Drilcon has not recovered from Holms, but has collected a $170,000 settlement from Sun Escrow, said amount being deducted from the Montana district court judgment. Drilcon filed this suit on August 13, 1982. The jury found in favor of Drilcon and awarded damages. Roil and White appeal and raise numerous convoluted issues. We identify the following issues for review:
1. Must there be a fiduciary relationship as a prerequisite to a finding of constructive fraud?
2. Did the District Court commit reversible error when it allowed the jury to compare Holms' and Sun Escrow's fraud with the alleged negligence of Clinton White and Roil Energy?
3. Did the fraud of Sun Escrow and Holms supersede any negligence by Roil Energy and/or Clinton White?
4. Did the trial court correctly instruct the jury on the elements of piercing the corporate veil?
5. Is constructive fraud sufficient to pierce the corporate veil?
6. Is there substantial evidence in the record to support the jury's piercing Roil's corporate veil?
7. Is there substantial evidence in the record that Roil Energy breached its contract with Drilcon?
In their first issue, appellants assert that the District Court committed reversible error when it gave the following instruction to the jury:
The plaintiff Drilcon, Inc., has alleged that the defendants are liable to it on the basis of constructive fraud. Constructive fraud means any breach of duty which, without fraudulent intent, gains an advantage to the person in fault by misleading another to its prejudice. There need be no fiduciary duty or confidential relationship between parties to justify a finding of constructive fraud. Where a party, by his words or conduct creates a false impression concerning serious impairments or other important matters and subsequently fails to disclose relevant factors, constructive fraud may be found. (Emphasis added.)
The second sentence of the above jury instruction is taken from Sec. 28-2-406, MCA. Defense counsel objected to the third sentence of the instruction at trial on the grounds that a fiduciary relationship is required before constructive fraud can be found. Appellants contend the instruction was prejudicial because the special verdict form required the jury to decide whether defendant Clinton White committed constructive fraud.
Three Montana cases appear to support appellants' argument that there must be a breach of a fiduciary relationship in an action for constructive fraud. Rowland v. Klies (Mont.1986), 726 P.2d 310, 43 St.Rep. 1788; Morse v. Espeland (Mont.1985), 696 P.2d 428, 42 St.Rep. 251, 253; Ryckman v. Wildwood, Inc. (1982), 197 Mont. 154, 641 P.2d 467. The latest of these cases, Rowland, states:
Constructive fraud is a...
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