Lappas v. Barker

• Decision Date: 20 September 1963
• Citation: 375 S.W.2d 248
• Parties: Theodore LAPPAS et al., Appellants, v. Milton BARKER et al., appellees.
• Court: United States State Supreme Court — District of Kentucky

Page 248

375 S.W.2d 248

Theodore LAPPAS et al., Appellants, v. Milton BARKER et al., appellees.

Court of Appeals of Kentucky.

Sept. 20, 1963.

Rehearing Denied Feb. 28, 1964.

Charles W. Dobbins, Woolsey M. Caye, Louisville, Tilford & Dobbins, Louisville, of counsel, for appellant.

Paul R. Huddleston, Bowling Green, Davis Williams, Munfordville, for appellees.

CLAY, Commissioner.

This suit was instituted primarily for the purpose of selling an oil and gas leasehold to satisfy a $50,000 note executed by the principal appellant Lappas. Upon the assertion of other claims in the suit, an accounting was had. Appellants took the position that the whole transaction out of which this $50,000 note arose was fraudulent, and they sought to cancel the note, rescind various leases and recover for certain expenditures. The Chancellor found against them on all phases of the controversy.

Lappas, who may be described as a capitalist from New Jersey, had worked with appellees Smith and Craighead in the acquisition and operation of oil and gas leases in Kentucky. While they were not partners, they had entered into several joint enterprises, with Smith and Craighead attending to the production end of the business.

In April 1959 Smith called Lappas and advised of the discovery of an attractive lease in Green County, designated the 'Jr. Ennis Lease'. Lappas was advised that Smith and Craighead had investigated the production and were willing to invest $50,000 of their own money in the purchase of this lease. When Lappas came to Kentucky, Smith and Craighead showed Lappas a production slip which indicated the lease was producing 8,200 barrels of oil per month. (This truly represented the production for the preceding month of March.) A 'stick test' was also made on the ground which indicated substantial daily production.

On April 28, 1959 the transaction was closed by the appellee owners assigning various interests to the appellants, and a one-fourth interest was assigned to Smith and Craighead. At the time of the closing the sale price was fixed at $200,000. Smith and Craighead each gave their checks for $25,000 to the owners, and in addition to $100,000 in cash paid by appellants, Lappas executed the $50,000 note. Thereafter additional wells were drilled but production rapidly fell off and the lease did not turn out to be the profitable venture originally anticipated.

Shortly after the closing of this transaction the owners returned to Smith and Craighead their $25,000 checks and it was subsequently learned by appellants that these two men had a secret agreement with the owners. This agreement was that Smith and Craighead would be entitled to anything they could get above $150,000.

Appellants contend the whole transaction was fraudulent. The first argument is that Smith and Craighead, with the acquiescence of the owners, misrepresented the production on the leasehold. There is ample support in the record for the trial court's findings that there was no material misrepresentation in this respect upon which appellants had the right to rely. Perhaps Smith and Craighead did not make sufficient investigation but they did not misrepresent the information they had obtained. In any event, the owners made no representation about production and they committed no fraud in this respect which would justify rescission of the transaction or cancellation of the $50,000 note.

The next contention is that the owners, acting jointly with Smith and Craighead, fraudulently conspired to make it appear that the actual sale price was $200,000 and that the latter two were investing $50,000 of their own money in this lease, which was not true; that appellants relied upon these facts as a material inducement to their entering into the transaction; that because of the relationship of appellants with Smith and Craighead and the latter's representations, they could reasonably rely on the integrity of the transaction; and they were defrauded into making a bod deal.

It is clear from the record that when this transaction was closed, one phase of it was completely fictitious and known by the owners and Smith and Craighead to be fictitious. Ostensibly Smith and Craighead were investing $50,000 of their own money in this lease. They and the owners knew this was false, and appellant Lappas had ample reason to believe it was true. The finding of the court that Smith and Craighead did not misrepresent the nature of their interest has no support in this record and is clearly erroneous. If he relied on this feature of the transaction to his detriment, he was defrauded.

It is contended that there is no evidence Lappas (or the persons he represented) relied upon Smith's and Craighead's apparently bona fide investment in this leasehold. While it is true the record fails to disclose a specific statement by Lappas concerning such reliance, the chain of circumstances, the nature of the representations made by Smith and Craighead and the necessary inferences to be drawn from Lappas' testimony make it clear the nature of Smith's and Craighead's apparent financial interest in this lease ($50,000) constituted a material inducement to Lappas to enter into it. In addition, the method by which the closing of this transaction was engineered by the owners with Smith and Craighead establishes that this totally unnecessary and fictitious maneuver was for a single purpose, and that was to induce Lappas (and those he represented) to become a party to it. The conclusion is inescapable that he did rely on Smith's and Craighead's ostensible financial interest as an inducement.

It is further contended by appellees that Lappas had no right to rely upon the misrepresentations of Smith and Craighead because they were acting as brokers for the owners and no fiduciary relationship existed between them and Lappas. The court found as a fact that no partnership or join adventure existed between Lappas and Smith and Craighead and that the latter were acting 'as brokers for the sellers'. The finding that no partnership existed is a correct one. The other two findings are clearly erroneous.

Smith, Craighead and Lappas were engaged in a joint adventure to purchase this leasehold. This term is simply descriptive and has been defined as 'an enterprise undertaken by several persons jointly'. Wyoming-Indiana Oil & Gas Co. v. Weston, 43 Wyo. 526, 7 P.2d 206, 208, 80 A.L.R. 1073. It exists when persons...