Elbukan Oil Co. v. Lamb

• Decision Date: 13 April 1926
• Docket Number: No. 6904.,6904.
• Citation: 12 F.2d 387
• Parties: ELBUKAN OIL CO. et al. v. LAMB.
• Court: U.S. Court of Appeals — Eighth Circuit

12 F.2d 387 (1926)

ELBUKAN OIL CO. et al. v. LAMB.

No. 6904.

Circuit Court of Appeals, Eighth Circuit.

April 13, 1926.

Clifton Williams, of Milwaukee, Wis., for appellants.

A. L. Berger, of Kansas City, Kan. (J. E. Thrift, of Sapulpa, Okl., and Dallas W. Knapp, of Coffeyville, Kan., on the brief), for appellee.

Before KENYON and VAN VALKENBURGH, Circuit Judges, and YOUMANS, District Judge.

YOUMANS, District Judge.

In the suit of B. W. Lemley et al. against the Elbukan Oil Company et al. in the United States District Court for the District of Kansas, C. B. White, C. V. Van Matre, and Henry M. Brown were, on January 12, 1923, appointed receivers of the property of the Elbukan Oil Company and M. T. C. Oil & Gas Company. At that time the Elbukan Oil Company was the owner of a number of oil and gas leases and pipe lines in Kansas and Oklahoma, and was producing and selling oil and natural gas, which natural gas was sold to consumers in and near Coffeyville, Kan. On May 29, 1923, on application of the receivers, an order was made by the court authorizing the receivers to enter into a contract with Homer T. Lamb, by which Lamb at his expense was to drill a deep test well for oil or gas upon a lease of the Elbukan Oil Company. In the contract the receivers were designated as parties of the first part, and Lamb as party of the second part. The contract recited that Lamb desired to obtain from the parties of the first part an assignment of certain oil and gas mining rights to certain lands in Montgomery county, Kan., and Nowata county, Okl., described in an exhibit made a part of the contract. It was provided in the contract that good and valid assignments of the said oil and gas leases should be placed in a bank named in the contract, to be by the bank held in escrow subject to the terms of the contract. The well was to be drilled at a point fixed in the contract within 60 days from the date the contract was authorized by the court. The contract provided that, if the second party found either oil or gas in paying quantities, the escrow agent was authorized to deliver said assignments to him.

The contract also contained the following provision:

"It is further understood and agreed that the lands involved herein, and covered or to be covered by the leases and assignments thereof herein referred to, shall be divided between the parties hereto upon the plan commonly referred to as checkerboarding. In the division of said leases between the parties hereto, the following method shall be pursued: Party of the second part shall be entitled to the tract upon which the said first test well is drilled; parties of the first part shall have the right to choose outside of that tract 80 acres of land covered by said leases; then second party shall have the right to 80 acres to be selected by him; then the first parties shall have the right to select 80 acres, the parties hereto continuing to thus exercise their choice alternately by 80 acres until all lands involved shall have been thus divided and checkerboarded between the parties to this agreement.

"It is understood and agreed that there are other and additional lands upon which the parties hereto desire that oil and gas leases shall be obtained, and to that end it is agreed that first parties shall set about the obtaining of those leases and the geologists for party of the second part shall determine what leases shall be taken and parties of the first part shall take said leases in their names as receivers or in the other names as may be determined by first parties under the orders of said court. Such acreage shall be divided between the parties hereto as is hereinbefore provided respecting the division of other acreage. It is further agreed that the parties hereto and their employees and assistants will obtain said additional leases and that party of the second part will pay all actual and necessary expenses connected with said leases, the cash rental for such lands, however, not to exceed $1 per acre per annum, it being understood that no bonus above the $1 per acre for rental aforesaid is to be paid unless agreed to by party of the second part. Said second party is to pay all expenses of abstracts of title, examination of same, and, in fact, all expenses connected with the obtaining of said leases as herein provided, except the solicitation and procurement of the contracts themselves. First parties may procure at expense of second party abstracts of title on all such new and additional acreage."

On the 9th day of October, 1923, the court, upon a similar application, authorized the receivers to enter into a similar contract with Homer T. Lamb with reference to drilling a test well on their leases in Montgomery and Labette counties, Kan. The test wells were drilled and at least one producing well was brought in.

On April 11, 1924, the Elbukan Oil Company filed a motion to set aside the two contracts on the following grounds:

"I. As joint owner of the properties known as the Alloway field and the Kellar field involved in said applications and orders with reference to said Lamb contracts that said corporations have permission to intervene at this time in this matter and contest as one of said joint owners, together with the other joint owner, the M. T. C. Oil & Gas Company, the validity of said contracts, by direct attack upon the same for the following reasons:

"(1) The said testimony referred to above, and the records and files in the above-entitled matter, show that there was no notice served upon either of said joint owning corporations which owned said property, or upon any of the creditors either before the applications for the orders permitting said contracts with said Lamb or afterwards, notifying any of them of said applications, and there was no notice served upon any of the same notifying them of any applications to confirm the said contracts between said receivers and said Lamb.

"(2) Because said testimony shows that the said Lamb approached the said receivers and sought from the leases which were attempted to be assigned to him, under circumstances which clearly show in said testimony that by the said contracts said Lamb attempted to procure above one-half of the leases in said fields under a pretended checkerboarding plan, and that said contracts were not entered into for the purpose of increasing the assets in the hands of the said receivers nor in providing funds with which to pay the creditors.

"(3) That the said testimony shows that the receivers accepted the geologists' reports which were produced by said Lamb, and the said receivers did not properly safeguard the interests of the corporations in that respect, all of which was known to said Lamb.

"(4) That, because said records show on their face and the said testimony shows that there was no checkerboarding map presented to the court at the time, the court was asked to approve said contracts.

"(5) Because said records and said testimony shows that at the time the court was asked to approve said contracts the court was only advised of the leases which the said receivers proposed to transfer to said Lamb under said contracts, and the court was not advised of the leases which the receivers proposed to keep, and the court was without facts upon which to base a decision as to the propriety of any checkerboarding plan or other division of the said property with said Lamb.

"(6) Because said testimony shows that there was an improper plan of division resorted to between said Lamb and said receivers, in that the plan resorted to was not in fact a checkerboarding plan and there was nothing before the court in the form of a checkerboarding plan for its approval, and in fact the court did not approve any such plan for the division of the said properties.

"(7) And because said contracts with said Lamb attempted to convey to said Lamb in perpetuity valuable interests of these corporations and without any necessity therefor and attempted to convey to said Lamb in said contracts valuable properties without a sufficient consideration, in a contract that was proposed to exist in perpetuity even after the discharge of the receivers herein, all in violation of the rights of the owners and the creditors herein.

"(8) Because the said testimony shows that the said contracts were entered into without a sufficient or valuable consideration on the part of the said Lamb, in that the testimony shows that this corporation and its joint owner had acquired said properties from the State Line Gas Company, with an opinion of their officers, based upon geological surveys, to the effect that there was oil under the Mississippi limestone under said properties and the drilling of a test well by said Lamb under said circumstances was not a valuable or sufficient consideration for the valuable interests which the receivers attempted to convey to him under said contracts, and under the circumstances surrounding said receivership.

"(9) Because said contracts are so ambiguous as to be void in any event.

"II. And this defendant further moves the court for an order bringing said Lamb into this proceeding and requiring him to show cause why said contracts should not be cancelled for the reasons mentioned above herein.

"III. And this defendant further moves the court to issue a restraining order to be forthwith served upon said Lamb restraining and enjoining him from in any way disposing of any interests in said leases so as to prevent the acquiring of any interests therein by any innocent purchasers or other third parties.

"IV. This defendant further moves the court for an order to be served upon said Lamb requiring him to account to this receivership estate and to these owners for all of the profits derived by him under said contracts over and above the reasonable productive costs thereof.

"V. And this defendant further moves the court to cancel, and set aside said contracts entered into with said Lamb and to issue an order...