Henderson v. Plymouth Oil Co.

• Decision Date: 17 January 1928
• Citation: 141 A. 197,16 Del.Ch. 347
• Court: Supreme Court of Delaware
• Parties: WILLIAM M. HENDERSON, ALBERT R. BUDD, WALTER J. WILSON and FLOYD B. LOCKHART, Complainants Below, and WILLIAM F. MCCULLOUGH and ROLLIN C. MONTELIUS, Intervening Complainants Below, Appellants, v. PLYMOUTH OIL COMPANY, a corporation organized and existing under the laws of the State of Delaware, MICHAEL L. BENEDUM, SARAH N. BENEDUM, JOSEPH C. TREES, TREES DEVELOPMENT COMPANY, LIMITED, LEVI SMITH, JEROME G. FARQUHAR, WILLIAM E. HUSTON, EDWARD C. STEARNS, THOMAS R. COWELL, WALTER S. HALLANAN, FOSTER B. PARRIOTT, ADDISON F. HOLLIDAY, J. CHARLES ADAMS, HENRY R. DAVENPORT, JOHN LAING, JOHN M. HOLLIDAY, RAY v. HENNEN, JOHN S. HANLON, ADDISON B. DALLY, JR., OVID D. ROBINSON, ELLSWORTH D. ROBINSON, JOHN J. KIRKLAND, H. D. MCCRACKEN, M. E. DAVIS, ARTHUR C. FLORES, S. A. MCCASKEY, C. H. HUSTON, ANNE A. ADAMS, THOMAS R. COWELL, JR., ELIZA COWELL, BETTY COWELL, MILES W. BOTTOMFIELD and SAMUEL M. DUNBAR, Defendants Below, Appellees

141 A. 197

16 Del.Ch. 347

WILLIAM M. HENDERSON, ALBERT R. BUDD, WALTER J. WILSON and FLOYD B. LOCKHART, Complainants Below, and WILLIAM F. MCCULLOUGH and ROLLIN C. MONTELIUS, Intervening Complainants Below, Appellants, v. PLYMOUTH OIL COMPANY, a corporation organized and existing under the laws of the State of Delaware, MICHAEL L. BENEDUM, SARAH N. BENEDUM, JOSEPH C. TREES, TREES DEVELOPMENT COMPANY, LIMITED, LEVI SMITH, JEROME G. FARQUHAR, WILLIAM E. HUSTON, EDWARD C. STEARNS, THOMAS R. COWELL, WALTER S. HALLANAN, FOSTER B. PARRIOTT, ADDISON F. HOLLIDAY, J. CHARLES ADAMS, HENRY R. DAVENPORT, JOHN LAING, JOHN M. HOLLIDAY, RAY v. HENNEN, JOHN S. HANLON, ADDISON B. DALLY, JR., OVID D. ROBINSON, ELLSWORTH D. ROBINSON, JOHN J. KIRKLAND, H. D. MCCRACKEN, M. E. DAVIS, ARTHUR C. FLORES, S. A. MCCASKEY, C. H. HUSTON, ANNE A. ADAMS, THOMAS R. COWELL, JR., ELIZA COWELL, BETTY COWELL, MILES W. BOTTOMFIELD and SAMUEL M. DUNBAR, Defendants Below, Appellees

Supreme Court of Delaware

January 17, 1928

STATEMENT OF THE CASE. This action was instituted in the Court of Chancery by minority stockholders of the Plymouth Oil Company, a Delaware corporation, on behalf of said company, to compel the surrender to, and cancellation by said company of 700,000 shares of the common capital stock of the company alleged to have been fraudulently and illegally acquired by the promoters of the company, as a secret profit in the promotion and organization of the company, and acquisition of its properties. The company is a nominal party, the complainants allege, for the reason that a majority of the directors are promoters who have been made defendants in the action.

The complaint is, that certain of the individual defendants designated as promoters of the Plymouth Oil Company, derived a secret and unlawful profit from the transfer to the corporation of its properties, which profit is alleged to be represented by the stock sought to be cancelled.

The assignments of error are twelve in number, the first one being that the court erred in entering a decree dismissing the complainants' bill of complaint. The others mean when taken together, that the Chancellor erred in not sustaining complainants' various contentions.

The company was organized to take over and develop certain oil leases and permits in Texas.

The original bill was filed on July 9, 1925, and a temporary restraining order was awarded. After argument, and after other stockholders had intervened in the suits, the Chancellor, on December 9, 1925 (15 Del.Ch. 40, 131 A. 165) refused to award an injunction and vacated the restraining order. On January 28, 1926, the complainants filed an amended bill, and the cause was heard by the Chancellor upon oral testimony of witnesses, beginning September 14, 1926, and continuing to September 29, 1926. On January 27, 1927 (15 Del.Ch. 231, 136 A. 140), the Chancellor entered a decree dismissing the bill of complaint, and from such decree the complainants prosecute this appeal.

The facts of the case are not only voluminous and complicated, but difficult to state in condensed form so as to make the issues clear.

There are, however, many relevant facts that are undisputed and they may be briefly stated as follows:

Frank T. Pickrell and certain associates, of El Paso, Texas, were the owners of oil and gas leases and permits, covering some 431,000 acres of State University lands in Reagan County, Texas.

In May, 1923, a well was completed on one of the permits, known as Santa Rita No. 1 well. It was many miles from any other oil development. At the time this well was completed there were two other wells in process of development, and approximately $ 200,000 had been spent on the property.

Pickrell and his associates were in pressing need for additional working capital to drill more wells, and thus validate certain permits which would expire in July, 1924. Pickrell tried to sell an interest in the properties to various large oil companies, but without success. It involved the payment of $ 200,000 to himself and his associates to reimburse them for their expenditure in drilling the first well, and an agreement on the part of the purchaser to complete the drilling of other wells at an estimated expenditure of $ 200,000. It involved the retention by Pickrell and his associates of a quarter interest in the properties.

In September, 1923, Pickrell appeared in Pittsburgh and endeavored to interest some people known as the Benedum or Benedum-Trees group, in his proposition.

That group embraces virtually all of the defendants with the exception of Davenport and Laing. The result was that a tentative proposition was made to Pickrell which was reduced to letter form.

The letter reads:

"September 11, 1923.

"Mr. Frank T. Pickrell, El Paso, Texas--Dear Sir: Confirming our tentative arrangement with you today in regard to your holdings in Reagan county, Texas, I am satisfied that our people would be willing to favorably entertain a proposition to take over section two in block two along with wells thereon, with additional three sections, all four of which are held on ten years' lease, and an additional twelve sections adjacent to or surrounding this lease, along the following lines:

"We to organize a company in which you and your associates are to receive a one-quarter interest, and our people to reimburse you for actual expenses on within described properties to date not to exceed $ 200,000. We will also assume the expenses and completion of the two wells now drilling, and in addition four other wells to be located at points to be agreed upon.

"All of which to be subject to our decision after examination by our geologist now on the ground and whom we will instruct to make careful examination at once and forward recommendations at the earliest possible moment.

"In the event we close a trade for the properties described above our people will agree to finance the entire proposition.

"Yours truly,

--."

About the same time the Benedum group instructed Hennen, a geologist, who was then in Texas, to get in touch with Pickrell on his return and make an examination of the property. This Hennen did, spending about eight days in the examination. He then received a telegram instructing him to bring Pickrell to Pittsburgh to close a contract. They arrived on October 5, 1923, and Hennen at once reported to his associates. Pickrell went first to a hotel, and later met Cowell, Smith, Hennen, Holliday, Adams, Stearns, Farquhar, and probably others, at the Benedum-Trees' office, where a conference was had. The essentials of the contract were agreed upon, and an attorney was delegated to prepare the agreement. This was ready by the next morning when copies of the draft were given to Pickrell's attorney who had arrived in the night. The contract was executed on October 8, 1923, though bearing date October 5, when the agreement was made.

By this contract Pickrell, on behalf of himself and those associated with him in the ownership of the properties in question, agreed to sell and convey to Stearns, in whose name the contract was made as representing the Benedum group, the lease on the four sections containing the Santa Rita well, with permits on the surrounding twelve sections selected by Hennen, in all 10,240 acres with the well and certain equipment, for the following considerations:

(a) The sum of $ 200,000 one-fourth in cash, and the remainder in three equal payments at thirty, sixty and ninety days. Also an additional sum sufficient to refund to Pickrell the amounts expended in the drilling of the two uncompleted wells.

(b) One-fourth of the capital stock of a corporation (Big Lake Oil Company) to be organized by the promoters, to take over the properties, with the right to Pickrell to designate two of the seven directors.

(c) Completion by Stearns of the two wells then drilling, and the drilling within a stipulated time of four additional wells, the location of which was to be approved by Pickrell, and so located that if they proved to be producing wells, they would validate certain other permits retained by Pickrell and his associates.

The capitalization of the Big Lake Corporation, of which Pickrell and his associates were to receive one-fourth and Stearns three-fourths, was to be $ 2,000,000 (later changed on the request of Pickrell to $ 4,000,000). The title to said lease and permits was to be vested in the Big Lake Company.

Pickrell required and obtained what were, apparently, adequate guaranties for the full performance of the contract on the part of Stearns. The written contract of guaranty was signed by Benedum, Farquhar, Cowell and Smith.

Following the signing of the contract Pickrell, accompanied by Stearns, returned to Texas to prepare for closing the transaction by delivery of title on November 5, in accordance with the terms of the contract. In the meantime, Pickrell's constituents also ratified the contract. Some difficulties in securing proper title to the permits caused delay in closing the contract until November 16, to which time the date for closing was extended with the assent of the guarantors.

On November 16, 1923, title papers were delivered and possession of the property was given to the representatives of the Plymouth Oil Company. Check and notes for the cash consideration were delivered to Pickrell, and one-fourth of the stock of the Big Lake Company at the same time.

At the organization meeting of the directors of Big Lake Oil Company on October 22, 1923, Stearns proposed to sell to the corporation his rights under the Pickrell contract, and further to perform the obligations to pay the money considerations moving to Pickrell thereunder, and to drill the wells therein provided for, all in consideration of 400,000 shares of the...