Gamble v. Cornell Oil Company

• Decision Date: 13 October 1958
• Docket Number: No. 5764.,5764.
• Citation: 260 F.2d 860
• Parties: James N. GAMBLE, Executor of the Estate of Cecil H. Gamble, deceased, Clarence J. Gamble, Sidney D. Gamble and Sarah B. Gamble, individually, and also doing business as Gamble Brothers, a partnership, Appellants, v. CORNELL OIL COMPANY, a corporation, F. E. Harper, Waldo E. Stephens, Ray Stephens, C. Wayne Stephens and Harold G. Stephens, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

260 F.2d 860 (1958)

James N. GAMBLE, Executor of the Estate of Cecil H. Gamble, deceased, Clarence J. Gamble, Sidney D. Gamble and Sarah B. Gamble, individually, and also doing business as Gamble Brothers, a partnership, Appellants, v. CORNELL OIL COMPANY, a corporation, F. E. Harper, Waldo E. Stephens, Ray Stephens, C. Wayne Stephens and Harold G. Stephens, Appellees.

No. 5764.

United States Court of Appeals Tenth Circuit.

October 13, 1958.

John Joseph Snider and Herbert F. Hewett, Oklahoma City, Okl. (L. Karlton Mosteller and Mosteller, Fellers, Andrews & Loving, Oklahoma City, Okl., of counsel, were with them on the brief), for appellants.

V. P. Crowe and Coleman Hayes, Oklahoma City, Okl. (T. Murray Robinson, Coleman Hayes, Stanley B. Catlett, V. P. Crowe, Val R. Miller and Lee B. Thompson, Oklahoma City, Okl., were with them on the brief), for appellees.

Before BRATTON, Chief Judge, and PHILLIPS and LEWIS, Circuit Judges.

PHILLIPS, Circuit Judge.

James N. Gamble, Executor of the estate of Cecil H. Gamble, deceased, Clarence J. Gamble, Sidney D. Gamble and Sarah B. Gamble, individually, and as members of Gamble Brothers, a partnership,¹ brought this action against Cornell Oil Company,² a corporation, F. E. Harper, Waldo E. Stephens, Ray Stephens, C. Wayne Stephens and Harold G. Stephens, seeking a decree cancelling certain assignments of oil and gas leases, hereinafter more particularly referred to, except as to the horizons from which Cornell and Harper were producing oil, and to recover damages for alleged drainage from the properties covered by such leases.

From a judgment in favor of the defendants below, the plaintiffs have appealed.

On August 19, 1947, Ray Stephens, Inc. and Gamble Brothers, a partnership consisting of Cecil Gamble, Clarence Gamble and Sidney D. Gamble,³ were the owners of undivided interests in eight oil and gas leases situated in Caddo County, Oklahoma, known as the Wilhite, the Thompson, the Kidd, the Heuron, the Curtis, the Melton, the Farwell and the Griffin Leases, respectively.⁴ They had acquired such leases prior to the year 1940. On August 19, 1947, they entered into a contract⁵ for the further development and operation of such leases with Stephens Petroleum Company.⁶ In the development contract Ray Stephens, Inc. was designated as party of the first part, the partnership and the individual members thereof were designated as parties of the second part, and the Stephens Company was designated as party of the third part. In the development contract the party of the first part and the parties of the second part agreed simultaneously with the execution and delivery thereof, to execute and deliver appropriate written instruments selling and transferring the combined undivided interest in the undeveloped portion of each of such leases to the Stephens Company, reserving however, to the party of the first part and parties of the second part certain stipulated overriding royalties in the working interests in such leases.

Other provisions of the development contract here pertinent read as follows:

"(6) The main consideration for the sale, transfer and assignment of said undeveloped portion of said leases and leasehold estates is the prompt, diligent and efficient development and operation thereof, and said third party hereby agrees and obligates itself in due course to diligently and efficiently develop and operate said leases and the producing wells thereon, * * *

"(7) As to the development program of said undeveloped portion of said leases, the said third party is to drill such wells as it deems necessary and essential to properly develop and protect said leases, and it has the sole discretion as to the selection of the location of the well or wells to be drilled and the depth thereof, and in the absence of bad faith or fraud upon its part shall not be liable for mistake and/or bad judgment in this regard. * * *

"(8) The parties hereto contemplate that it may require at least two years time to carry out and complete the drilling program necessary to develop and protect said leases. Said third party, within ______ days from the date of the execution and delivery of this contract, shall commence the development of the undeveloped portions of said leases and continue such development with due diligence to the best of its ability until such undeveloped portions of said leases have been developed and protected. * * *

* * * * * *

"(15) The third party is hereby given two (2) years from date of the execution and delivery of this contract within which to protect, by development, said undeveloped leases against cancellation. As to any of said undeveloped leases which have not been protected under the development program provided for herein within said two-year period, said third party hereby agrees and obligates itself to reassign to said first and second parties the interest which it acquired from them in such lease or leases free and clear of all claims of every kind and character of said third party, or any one claiming under it, and in this connection said third party agrees to protect and hold them harmless from any and all such claims. * * *

* * * * * *

"(21) This contract shall not be placed of record except upon failure of said third party to carry out and perform the terms and provisions thereof. In this connection, however, said first and second parties may determine when and under what circumstances they will file this contract for record. * * *"

The contract was never recorded.

On September 2, 1947, Ray Stephens, Inc. and the partnership executed and delivered to the Stephens Company a separate assignment and agreement as to each of such leases, whereby Ray Stephens, Inc. and the partnership transferred the undeveloped portion of each of such leases to the Stephens Company and the Stephens Company transferred to the partnership a 1/32 overriding royalty in the working interest in such undeveloped portion of each of such leases.

The assignments were duly recorded in April, 1948, in the office of the County Clerk of Caddo County, Oklahoma. Such assignments made no reference to the unrecorded development contract, contained no express covenants to develop or protect against drainage, and provided that they would continue in force as long as the oil and gas leases, or any extension or renewal thereof, covering the acreage described in the assignments, should remain in full force and effect.

Prior to the execution of the development contract there had been very little development on the leases and there had been no drilling activity on the Wilhite Lease since October 30, 1945; on the Thompson, Heuron and Curtis Leases since 1939; on the Kidd Lease since 1941, and on the Melton Lease since 1944. The Stephens Company drilled three wells in 1948; two wells in 1949; one well in 1950; four wells in 1951, and one well in 1952 on the acreage covered by such assignments.

In April, 1952, the partnership assigned to the Stephens Company certain undivided interests in the Thompson, Wilhite, Melton and Heuron Leases, which had been previously excluded from the 1947 assignments. The 1952 assignments were duly recorded on June 5, 1952, in the office of the County Clerk of Caddo County, Oklahoma. Such assignments contained no reference whatever to the development contract and contained no express covenants to develop or protect against drainage. Neither the plaintiffs nor the partnership has ever sought to recover the interests transferred by such assignments.

At all times here material after September, 1947, Edgar Z. Wallower acted as the representative of the partnership and its individual members in all matters with respect to the development contract and their interests in the leases.

On March 11, 1949, Waldo E. Stephens, acting for the Stephens Company, wrote a letter to Wallower in which he stated, among other things, that the two-year period for the development of the undeveloped portion of the leases covered by the contract was nearing termination and, for reasons set forth in the letter, asked for an extension of time for the completion of such development program. Shortly thereafter Wallower and Waldo E. Stephens agreed that the Stephens Company should have such extension of time, but no specific period of extension was fixed.

On April 20, 1953, the Stephens Company filed a voluntary petition for reorganization under Chapter 10 of the Federal Bankruptcy Act (11 U.S.C.A. § 501 et seq.). At such time all the stock in the Stephens Company was owned by four brothers, Waldo E. Stephens, Ray Stephens, C. Wayne Stephens and Harold G. Stephens, who were also the directors and officers of the corporation. Efforts to reorganize had not been successful and in the latter part of 1954 the court entered an order directing that effective steps looking to reorganization should be taken on or before December 13, 1954.⁷

On December 10, 1954, Waldo E. Stephens, Executive Vice President of the Stephens Company, Anson L. Clark, President of Cornell and President of Indian Royalty Company⁸ and Harper had a conference at Harper's home for the purpose of considering the acquisition of the oil properties of the Stephens Company by Cornell and Harper. At such conference it was agreed that Clark would obtain a $200,000 bank loan and deposit the same on behalf of the Royalty Company with the trustee in bankruptcy to stay the proceedings until the sale of the properties of the Stephens Company could be consummated. Thereafter, on December 13, 1954, a written agreement was entered into between the four Stephens brothers, owners of all the stock of the Stephens Company, and the Royalty Company by which it was provided that on or before December 13, 1954, the Royalty Company would deposit in the registry of the bankruptcy court $200,000, pursuant to the plan of reorganization proposed to the court in the reorganization proceedings by the Stephens brothers, on December 6, 1954. The agreement...