Krumholz v. Goff

• Decision Date: 28 March 1963
• Docket Number: No. 14862,14863.,14862
• Citation: 315 F.2d 575
• Parties: Max KRUMHOLZ and Emil Moosmann, Plaintiffs-Appellees, v. James Beckham GOFF and Mary Lois Goff, Defendants-Appellants. Max KRUMHOLZ and Emil Moosmann, Plaintiffs-Appellants, v. F. T. CANTRELL and Mary Cantrell et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

315 F.2d 575 (1963)

Max KRUMHOLZ and Emil Moosmann, Plaintiffs-Appellees, v. James Beckham GOFF and Mary Lois Goff, Defendants-Appellants.

Max KRUMHOLZ and Emil Moosmann, Plaintiffs-Appellants, v. F. T. CANTRELL and Mary Cantrell et al., Defendants-Appellees.

Nos. 14862, 14863.

United States Court of Appeals Sixth Circuit.

March 28, 1963.

COPYRIGHT MATERIAL OMITTED

Robert M. Coleman, Bowling Green, Ky., Coleman, Harlin & Orendorf, Bowling Green, Ky., Eugene H. Alvey, Louisville, Ky., on brief, for Max Krumholz and others.

Charles I. Dawson, Louisville, Ky., Earl S. Wilson, Louisville, Ky., on brief; Bullitt, Dawson & Tarrant, Louisville, Ky., of counsel for James Beckham Goff and others.

Joseph J. Leary, Frankfort, Ky., Robert M. Spragens, Lebanon, Ky., on brief; Smith, Reed & Leary, Frankfort, Ky., of counsel, for F. T. Cantrell and others.

Before CLIFFORD O'SULLIVAN, Circuit Judge, and ROBERT L. TAYLOR and RALPH M. FREEMAN, District Judges.

RALPH M. FREEMAN, District Judge.

These appeals (Nos. 14862 and 14863) are taken from judgments entered in two related diversity cases tried by the Court without a jury under a consent order of consolidation. The plaintiffs, Max Krumholz and Emil Moosmann, are appellees in No. 14862 and appellants in No. 14863. James Beckham Goff and Mary Lois Goff, his wife, are the defendants and appellants in No. 14862. Several individuals referred to throughout this litigation as the Cantrell group are defendants and appellees in No. 14863.

These cases were instituted to rescind the assignments of certain working interests in an oil and gas lease, known as the Leachman lease, in Green County, Kentucky, and to recover the sums paid and expenses incurred pursuant to the terms of the assignments. Defendants in both cases filed counterclaims for damages on the ground that the plaintiffs breached alleged implied obligations under the assignments (1) to operate the existing wells in a proper and workmanlike manner; and (2) to further develop the leasehold. The defendants, Goff and wife, are appealing from the judgment rescinding the sale of their 5/32 working interest in the lease, while the plaintiffs, Krumholz and Moosmann, are appealing from the judgment dismissing their complaint for rescission of the 17/32 working interest of the Cantrell group in said lease. The briefs raise no issue concerning the dismissal of the counterclaims.

Plaintiffs' actions for rescission arise from the following events. Activity in the oil fields of Green County, Kentucky, lured the plaintiffs, Krumholz, a certified public accountant, and Moosmann, a retired dairyman, both residents of New Jersey, to that County on January 1, 1959. On that same day, while at a restaurant in Greensburg, Green County, Kentucky, they were introduced by a farm boy to the defendant, James Beckham Goff, a former automobile salesman and dealer. After some conversation, Goff stated that he would sell his 5/32 interest in the Leachman lease for a satisfactory price, quoting Krumholz a price of $500,000 for all working interests in the lease, and offered to contact the owners of the other interests if Krumholz was interested at that figure. Krumholz expressed an interest and asked that Goff immediately show Moosmann and him the leased property. Consequently, Goff drove the plaintiffs, Krumholz and Moosmann, to the property in his car. During this trip, in response to an inquiry of Krumholz about the oil production on the property, Goff either stated the lease was producing 600 barrels per day, according to Krumholz, or could produce 600 barrels per day if the weather was favorable and trucks were available, according to Goff. At this time, Krumholz and Moosmann saw the boundaries of the property involved.

Later the same day, or the next day, Goff introduced Krumholz and Moosmann to Mr. Cantrell and Judge Durrett, the principal members of the Cantrell group, at Judge Durrett's office in the courthouse at Greensburg, on which occasion, after some negotiations, it was agreed that the $500,000 figure quoted by Goff for the entire working interest in the lease was satisfactory if payable 40% in cash and 60% by reserving a share of the oil production. It was also agreed at that time that the Cantrell group would give Krumholz and Moosmann an option to purchase their 17/32 working interest in the lease on the terms hereinafter set forth.

On January 2, 1959, pursuant to prior arrangement, Krumholz and Moosmann and their attorney, Eugene Alvey, met with Cantrell, Judge Durrett and other members of the Cantrell group and their attorney, Robert Spragens, and Goff and possibly others at Judge Durrett's office, and following further negotiations concerning option provisions, including the terms of a warranty clause, the Cantrell group, for a consideration of $5,312.50, executed and delivered to Krumholz and Moosmann an option to purchase until January 31, 1959, their 17/32 interest in the lease for the sum of $106,250 cash, with credit for the amount paid for the option, and a reservation by the Cantrell group of 17/64 of the oil produced on the lease after deducting the landlord's royalty until they had received a further consideration of $159,375, making a total consideration of $265,625 for the 17/32 interest, being such prorata share of $500,000 for the entire working interest. The $5,312.50 payment for the option was a proportionate share of $10,000 offered by Krumholz for options on all interests consisting of the Cantrell group's 17/32 interest, Goff's 5/32 interest, and the remaining 10/32 interest owned by some people named Dulworth.

The option contained a warranty clause as follows:

"7. First Parties represent and warrant that the daily production on this lease is approximately 400 barrels per day and Second Parties rely upon said warranty and representation in entering into this agreement."

This warranty provision was demanded by Krumholz, who initially suggested 600 barrels' daily production of oil as a result of his conversation with Goff the previous day, but finally accepted 400 barrels' daily production, as set forth in the option, after the Cantrell group declined to warrant either 600 barrels or 500 barrels daily, as suggested by Krumholz. Although Goff was present when the Cantrell option was being prepared, he denied any participation in the preparation of the warranty clause or discussion as to the terms thereof, and there is no evidence to the contrary. Cantrell testified that Krumholz, on this occasion, stated that "he had to have some estimate there to take back with him to his group" and Alvey testified Krumholz said — "If it's any less than 400, I'm not interested."

The following day, January 3, 1959, Krumholz and Moosmann and their attorney, Alvey, met with Goff and the Dulworths and their attorney and accountant in Louisville. On this occasion, the Dulworths decided not to sell their interests because of tax consequences, but Goff executed and delivered to Krumholz and Moosmann for a consideration of $1,562.50 an option to purchase his 5/32 interest for $31,250 cash, with credit for the amount paid for the option, and the additional consideration of $46,875 to be paid from a 5/64 share of the oil produced on the leased property. Otherwise, the terms and provisions of the Goff option were identical with those in the Cantrell option, including the production warranty provision. Goff testified that he carefully considered the warranty language and that it was conservative and accurate as of the date made.

Subsequently, the plaintiffs, Krumholz and Moosmann, notified the Cantrell group and Goff by separate letters dated January 14, 1959, that they elected to exercise their options and would tender the balance of the purchase price at Greensburg on or about January 30, 1959. On that date, Krumholz and Moosmann came to Greensburg and informed Goff and the Cantrell group and their attorneys that they had been unable to raise sufficient funds to exercise both options, and after some discussion, paid Goff in full the cash consideration required by his option, and paid the Cantrell group the sum of $5,000 to be credited on the cash purchase price for an extension of their option. Thereupon, Goff and wife executed and delivered to Krumholz and Moosmann an assignment in the form of a quit claim conveyance of their 5/32 working interest in the lease, and the Cantrell group executed and delivered to plaintiffs a written extension of their option to March 2, 1959. The Goff assignment dated January 30, 1959, described the leased property in general terms stating that it contained "80 acres more or less," and no reference was made to the production warranty of 400 barrels per day contained in the option of January 3, 1959.

On February 28, 1959, Krumholz and Moosmann and their attorney met with the Cantrell group and their attorneys in Greensburg for the purpose of paying the cash balance on the latter's 17/32 working interest and to close the transaction in accordance with the terms of the option. Several members of the Cantrell group testified that Krumholz on that occasion stated that everyone knew the lease was not producing 400 barrels per day as had been warranted, that an adjustment should be made, and if the Cantrell group would give plaintiffs the proceeds of the February, 1959, oil run attributable to their working interest, they would go ahead and close the deal. Krumholz and Moosmann testified there was no discussion of oil production on that occasion, and that they had no information that the actual oil production was below the warranty of 400 barrels per day until March 5, 1959, when they received a report from Buell Abney, an oil operator placed in charge of the lease by plaintiffs on March 2, 1959. In any event, the Cantrell group agreed to give Krumholz and Moosmann their share of the February oil production, and with this added condition, the Cantrell option was exercised on February 28, 1959, by...