Justheim Petroleum Company v. Hammond
| Decision Date | 29 November 1955 |
| Docket Number | 5014.,No. 5013,5013 |
| Citation | 227 F.2d 629 |
| Parties | JUSTHEIM PETROLEUM COMPANY, a corporation, Appellant, v. Laurence HAMMOND and C. D. Flournoy and Milford Giffin, a partnership doing business as Flournoy and Giffin, Appellees. Clarence I. JUSTHEIM, Appellant, v. Laurence HAMMOND and C. D. Flournoy and Milford Giffin, a partnership doing business as Flournoy and Giffin, Appellees. |
| Court | U.S. Court of Appeals — Tenth Circuit |
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Brigham E. Roberts, Salt Lake City, Utah (Calvin W. Rawlings, Harold E. Wallace, Wayne L. Black and J. Reed Tuft, Salt Lake City, Utah, on the brief), for appellants.
George M. McMillan, Salt Lake City, Utah, for appellees.
Before BRATTON, MURRAH and PICKETT, Circuit Judges.
This action has its source in a contract executed by the plaintiff Laurence Hammond and the defendants Justheim Petroleum Company and Clarence I. Justheim. The first cause of action is for damages caused by an alleged breach of contract by the company and Justheim. The second cause of action is for deceit on the part of the defendants Justheim Petroleum Company, Clarence I. Justheim, F. F. Hintze, Hugh J. Hintze and J. Darrell Nicodemus. The case was tried to a jury which found for the plaintiffs against only the company on both causes of action. The court upon motion entered a judgment notwithstanding the verdict against the defendant Clarence I. Justheim on the first cause of action.
On May 25, 1953, Hammond acquired a block of oil and gas leases in Dawes County, Nebraska, under an agreement requiring him to drill a test well. On July 4, 1953, the well was drilled to a depth of 2,632 feet, but Hammond was required to shut down drilling because of lack of finances. At this time, it was believed that granite would be reached at about 2,900 feet. In attempting to raise additional funds, Hammond negotiated with a man named Connor of Denver, Colorado, who came to the well site with F. F. Hintze, a geologist. Hintze made a rather detailed examination of the drilling reports and available geologic information including the surface geology. He talked to the drillers and two geologists, one of whom had written a report on the structure and the other of whom was in charge at the well. After this examination Connor and Hintze returned to Denver. On August 3, 1953, Hintze notified Hammond that Connor was unable to raise the necessary funds within the time required, and advised him that he believed that he had a source of money in Salt Lake City, Utah. Hintze was granted a five-day option upon terms which required a payment of $5,000 in cash and a contribution of $25,000 for past expenses in exchange for a fifty per cent interest in the well and leases. If the deal was consummated, Hintze understood that Connor was to receive one-half of the $5,000 for his part in the transaction.
Hintze immediately returned to Salt Lake City, and detailed information concerning the acreage and geological reports was sent to him there. During the next few days there was constant communication between Hammond and Hintze. Hintze advised Hammond that it appeared certain that the deal would go through and suggested that they make preparation to continue the drilling. On August 8, Hintze wired Hammond that the company wanted a Schlumberger electric log of the well. Upon receipt of this telegram, Hammond called Hintze, who identified his principals as Justheim or Justheim Petroleum Company. They were not in agreement as to the Schlumberger test and on August 9th, Hintze called Hammond and requested him to fly to Salt Lake City to complete the deal. Upon arrival in Salt Lake City, Hammond met with Hintze, H. G. Hintze, Justheim, and Nicodemus.1 Justheim was president of Justheim Petroleum Company, and Nicodemus was secretary. F. F. Hintze was the managing geologist of the company and the holder of a substantial block of stock which had been given him for this service. Hintze advised Hammond that he had neglected to tell Justheim that the option required a $25,000 payment for past expenses and that if this sum were mentioned, the deal would probably fall through. At the beginning of the conference, Justheim appeared to know all about the transaction and asked no detailed questions. The negotiations started with the elimination of the $25,000 payment for a fifty per cent interest. The contract agreed upon, in addition to $5,000 in cash, provided that $12,500 should be paid for a seventy per cent interest, including a ten per cent interest which Hintze was to receive from Justheim and Justheim Petroleum Company. It was disclosed at that meeting that Connor was to receive one-half of the $5,000 as a commission.
Justheim was told that during the drilling operations, showings of oil had been encountered at the Lower Sundance, the Converse, and the Upper Minnelusa Sands. Hammond advised Justheim that he believed that there were three possible productive sands below the drilling, including the Leo Sand which had been quite productive in the Lance Creek Field in Eastern Wyoming.
Hammond demanded a written contract and Justheim stated that he could not remain at the meeting, but that Nicodemus had full power and authority to act for him, and he assured Hammond that what Nicodemus did would be satisfactory.2 Justheim left and Hintze proceeded to type the contract in which Hammond was designated party of the first part, and Clarence I. Justheim and Justheim Petroleum Company were referred to as joint parties of the second part.3 The contract required the payment of $5,000 upon its execution and the deposit of $12,500 in the First National Bank of Chadron, Nebraska in escrow with instructions to pay that sum to Hammond upon certification that the well had been deepened as required and an assignment of the oil and gas leases deposited. Hammond was obligated to deepen the well forthwith and continue with diligence until completed. He was also required to use his best efforts to obtain certain additional leases. The parties of the second part were to pay seventy per cent of the cost of a Schlumberger electric log and all other tests ordered by Justheim. The contract gave "full and complete power of supervision of the deepening operation" to Hintze, "the geologist of the second party". Justheim paid the $5,000 with his personal check. He testified that the company refunded the amount to him at a later date. Hammond returned immediately to Chadron, Nebraska, which was near the well, and shortly thereafter deposited the assignment of the leases with the bank as required by the contract. He also obtained the additional leases required by the contract. In the meantime, the drillers continued drilling and encountered granite.
Upon Hammond's arrival, he found that the drillers had encountered granite and called Hintze to get on the job immediately, which he did on August 11th. Hintze took charge of the activities at the well upon arrival. He ordered tests run to determine if there was commercial production in any of the different sands which had been encountered. After receiving a negative report of the test of the granite wash, he ordered the other possible zones of production to be tested and returned to Salt Lake City and discussed the matter with Justheim. Hammond was instructed by Justheim and Hintze to report to them by telephone the results of each test. When Hintze left, he took with him a sample from the drilling, which appeared to be saturated with oil. Hintze told Justheim that he believed they had an oil well. Justheim told others that he had acquired what appeared to be an oil well. In the meantime, Hammond left for Amarillo, Texas to acquire additional leases in the area.
After Hintze had all the information regarding the well, and after he had reported to Justheim, Hammond was notified that the $12,500 had been forwarded to the bank. A check drawn on the Justheim Petroleum Company was forwarded to the Chadron bank with instructions to deposit it to the credit of Clarence I. Justheim and J. Darrell Nicodemus. The bank was advised by letter that Justheim and Nicodemus would arrive shortly and would furnish instructions for the handling of the money. Within a few days, it was determined that there would be no production from the well. Justheim then notified Hammond by telegram that he was cancelling the contract, and he demanded the return of the $5,000. The reason given for the cancellation was that Hammond had represented "that the Leo Sand was ahead of the bit" when in fact the well log showed that the sand had been passed through when the contract was made. In demanding the return of the $5,000 he referred to it as "my money".
The defendants first contend that even though Hintze was acting as agent for the company and Justheim, they were entitled to a directed verdict upon the first cause of action because Hammond admitted that he paid Hintze $2,200 of the $5,000 for his services in obtaining the contract. This contention is predicated upon the rule that knowledge and acts of an agent acting adversely to his principal and in collusion with another to cheat and defraud the principal, will not be imputed to the principal for the benefit of one who participates. Powerine Co. v. Russell's, Inc., 103 Utah 441, 135 P.2d 906; Herdan v. Hanson, 182 Cal. 538, 189 P. 440. However, any money received by Hintze was not from Hammond, but according to Hintze's own testimony, it was from Connor. The money was delivered to Hintze for Connor, and Hintze accounted to Connor for it. This accounting included a division of a portion of the $2,200, the settlement of a debt due Hintze from Connor, and the payment of some expenses. It was known to the parties during the discussions preceding the contract that Connor would receive a portion of the $5,000, and that Hintze would receive a ten per cent interest which the contract provided was to be taken from the seventy per...
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