Martin v. Edwards

• Decision Date: 10 April 1976
• Docket Number: No. 47924,47924
• Citation: 548 P.2d 779,219 Kan. 466
• Parties: William F. MARTIN, Appellant, v. R. M. EDWARDS, Appellee, and Sidney A. Martin, Defendant.
• Court: Kansas Supreme Court

Page 779

548 P.2d 779

219 Kan. 466

William F. MARTIN, Appellant, v. R. M. EDWARDS, Appellee and Sidney A. Martin, Defendant.

No. 47924.

Supreme Court of Kansas.

April 10, 1976.

Syllabus by the Court

1. A carried interest in oil and gas in place results from an arrangement between two or more co-owners of a working interest whereby one agrees to advance all or some part of development costs on behalf of the others and to recover such advances from future production, if any, accruing to the other owners' share of the working interest. It is customary for a carried interest relationship to cease when development costs are paid; thereafter the carried and carrying parties jointly own the working interest and share in the costs and receipts. There are varied types of carried interests but generally the interest of the one who makes the advance for development is known as the carrying interest. The interest of the one for whom advances are made is known as the carried interest.

2. Generally, where a person makes a promise to another for the benefit of a third person, that third person may maintain an action to enforce the contract even though he had no knowledge of the contract when it was made and paid no part of the consideration.

3. Beneficiaries of contracts to which they are not parties have been divided into three classes: Donee beneficiaries, creditor beneficiaries and incidental beneficiaries. Only those falling within the first two classes may enforce contracts made for their benefit.

4. Principles defining third person beneficiaries are stated.

5. A mere incidental, collateral, or consequential benefit which may accrue to a third person by reason of the performance of a contract, or the mere fact that he has been injured by the breach thereof, is not sufficient to enable him to maintain an action on the contract. Where the contract is primarily for the benefit of the parties thereto, the mere fact that a third person would be incidentally benefited does not give him a right to sue for its breach.

6. A beneficiary can enforce a contract if he is one who the contracting parties intended should receive a direct benefit from the contract.

7. In an action brought by one allegedly owning a carried interest to determine his rights in oil and gas leases, which interest arose by reason of a written contract between two persons holding the leases, the record is examined and it is held: (1) The written contract was ambiguous so as to permit resort to extrinsic evidence in determining the intent of the contracting parties; (2) plaintiff was not a third person donee beneficiary under the contract and had no right to enforce it beyond that of an indirect or incidental beneficiary; (3) other matters urged in reversal of the judgment are considered and the judgment is affirmed.

Hugh D. Mauch, of Keenan, Mauch & Keenan, P.A., Great Bend, argued the cause and was on the brief for appellant.

Jerry M. Ward, Great Bend, argued the cause, and Don C. Foss and Thomas J. Berscheidt, Great Bend, were with him on the brief for appellee.

HARMAN, Commissioner:

This is an action brought by one allegedly owning a 'carried interest' to determine his rights in certain oil and gas leases principally located in Rice and Ellsworth counties and for an accounting of the proceeds of those leases from the lessee. Trial to the court resulted in a judgment for the latter from which plaintiff has appealed. The principal issue is whether plaintiff became a third party beneficiary entitled to enforce a contract between the lessees.

Where discrepancy exists as to the factual background our recitation will be in the aspect most favorable to the defendant as the prevailing party in the trial court.

In 1966 Sidney Martin was a lawyer in Denver, Colorado, specializing in oil and gas law. His clients included persons who had oil interests in Ellsworth county, Kansas. Defendant R. M. Edwards, an investor residing in Tulsa, Oklahoma, was a large stockholder in several companies engaged in the manufacture of heat exchange equipment. One company in which Edwards held controling interest had in its employ as a sales specialist and administrative assistant plaintiff William Martin, a brother of Sidney Martin. Plaintiff and Edwards had become friends at work and also socially. Plaintiff William had introduced his brother Sidney to defendant Edwards at least as early as August, 1966. As a result of that introduction and their later friendship Edwards and Sidney eventually acquired interests as tenants in common in certain oil and gas leases in Ellsworth county. Following a new oil discovery in the vicinity of those leases Sidney, with Edward's consent, attempted to find open acreage available for lease. They acquired new leases in the area, Sidney evaluating and securing them and Edwards advancing the necessary funds. Initially all leases were acquired for speculative purposes with development contemplated by third parties.

One of these new leases, the Gemeinhardt, had a relatively short primary term and in order to extend it a test well had to be drilled. Sidney Martin tried unsuccessfully to interest third parties in drilling an exploratory well on the lease. He decided to go to New Orleans in hope of finding investors who would advance the necessary money. En route to that city on September 1, 1967, he stopped at Tulsa and at William Martin's home had an extensive conversation with Edwards concerning their leases. The upshot of the matter was that Edwards then orally agreed to furnish Sidney the funds to develop the Gemeinhardt lease and two others. It was agreed between him and Sidney that upon recovery of Edward's costs he and Sidney would own the leases in equal shares. William Martin then told Edwards that he, William, had brought Edwards and Sidney together and 'I am left out'. Edwards responded that he would talk to Sidney 'and see if he would give Bill Martin part of it'. Edwards did tell Sidney he wanted Sidney to 'take care of' his brother William out of Sidney's part. Thereafter Sidney prepared a letter dated September 12 1967, evidencing the oral agreement and both he and Ewards singed it:

The letter stated:

'This is written as a memorandum of our agreement of September 1, 1967, relative to the oil and gas leases in our Southwest Bushton block, Rice County, Kansas, more particularly identified as: (names and legal description)

'As we decided I have contacted Isern Drilling Company and arranged for them to drill the test well on the Gemeinhardt lease, commencing before the committment date, being September 26, 1967. You have agreed to bear the cost provided in the turnkey drilling contract. If the well is productive you will bear the cost of equipping the well for production.

'We have agreed that I and my brother Bill shall have what is known in the industry as a 50% carried interest in this well and the future events in the lease. In other words, you advance and pay the costs of drilling and equipping the wells on the lease and you are to receive all the net proceeds from the production of oil and gas from all of the wells until such time as you have received a sum totaling all such costs. At that time and thereafter I and William F. Martin shall have a 50% interest in the lease and the wells thereon and the equipment in, on and for the well or wells.

'I herewith hand you an assignment of oil and gas lease execulted by me, joined by my wife, to initially vest all title to the Gemeinhardt lease in you. At such time as you have recovered your costs in the lease and its development, you are to execute a reassignment to me, and William F. Martin, of 50% interest in the lease as then developed.

'Similarly, if we mutually decide to drill a well or wells on the Reichuber and/or Bieberle leases, and you undertake the cost of drilling the well or wells and equipping the same, I and William F. Martin shall have a 50% carried interest. It is understood that your cost of drilling and equipping is cumulative and you shall recover the costs of drilling and equipping of all wells from all the net proceeds from all wells on the leases before our 50% interest shall be effective to receive 50% of the proceeds. It is understood also that you may from time to time allow advances to me personally, but such advances shall be also recovered by you from the production before our direct participation.'

The agreement initially covered only three leases but it was later extended to cover thirteen others, all of which are the subject of this litigation. Sidney assigned his interest in the three leases to Edwards and a program of development commenced on them and on others acquired by the two. Sidney closed his law office and moved to Tulsa and Great Bend, Kansas, to operate the leases. He drew monthly advances from Edwards, first $500, then $1,000. Edwards received all oil runs and has continued to do so. By December, 1969, Edwards had advanced approximately $750,000 for development of the leases.

Because of this heavy investment Edwards became desirous of liquidating his interest in the leases. As a result two written agreements were entered into by Edwards and Sidney on June 26, 1970. One called for the establishment of an operating entity, a corporation to be known as Coronado Petroleum Corporation, to encourage investment by individuals in the leases in order to raise capital to buy out Edward's interest. This corporation was to be organized by Sidney. It was to receive $7,500 fee per month to cover operational and administrative costs. Edwards was to continue paying the fuel, maintenance, well service equipment, salt water disposal, roustabout service, well stimulation, lease rental, etc. required by the leases. The second agreement modified the September 12, 1967, agreement and provided that until May 1, 1971, Sidney would have the exclusive right to sell all of Edward's interest in the leases and from the sale proceeds Edwards would...