McRoberts v. Phelps

• Decision Date: 16 January 1958
• Citation: 138 A.2d 439,391 Pa. 591
• Parties: H. Theodore McROBERTS, Daniel Lauria, Robert Brandt, george E. Milner, Alfred H. Bowker, Joseph E. Phelps, E. J. Phelps, Sr., and Michael Phelps, trading as Phelps Prospecting Company, v. Joseph E. PHELPS, Keta Gas and Oil Corporation and Great Eastern Gas Corporation, Appellants. Appeal of GREAT EASTERN GAS CORPORATION.
• Court: Pennsylvania Supreme Court

Page 439

138 A.2d 439

391 Pa. 591

H. Theodore McROBERTS, Daniel Lauria, Robert Brandt, george E. Milner, Alfred H. Bowker, Joseph E. Phelps, E J. Phelps, Sr., and Michael Phelps trading as Phelps Prospecting Company, v. Joseph E. PHELPS, Keta Gas and Oil Corporation and Great Eastern Gas Corporation, Appellants Appeal of GREAT EASTERN GAS CORPORATION.

Supreme Court of Pennsylvania.

Jan. 16, 1958.

Rehearing Denied Feb. 14, 1958.

George I. Bloom, William S. Yard, Frank C. Roney, Bloom, Bloom & yard, Washington, Alexander Cooper, Pittsburgh, for appellants.

W. Denning Stewart, Thomas Lewis Jones, Dale Cleland, Pittsburgh, for appellees.

Before CHARLES ALVIN JONES, C. J., and BELL, CHIDSEY, MUSMANNO, ARNOLD, BENJAMIN R. JONES and COHEN, JJ.

BENJAMIN R. JONES, Justice.

This appeal presents a dispute between two groups--one allegedly a joint venture, the other a corporation--over the ownership of an 'override' royalty ¹ payable from the production of gas from several wells located in Elk County.

F. B. Oldham and J. E. Phelps met in Philadelphia in April, 1951 and discussed the possibility of jointly engaging in an enterprise to secure leases upon lands in Pennsylvania for the purpose of drilling thereon for gas oil. This discussion led to the formulation of the following plan: (1) a search would be made by them for lands having gas and/or oil potentialities; (2) in the event such lands were located, then they would negotiate with the owner or owners thereof for a lease for a limited time period within which to drill for gas and oil; (3) upon negotiation of a lease, then they would secure a drilling company to perform the actual drilling on the lands; (4) in the event that gas and/or oil were located, then the landowner and the drilling company would enter into an agreement under which the landowner would share with the drilling company on a percentage basis the royalities realized from the production of gas and/or oil. Oldham and Phelps would receive for their services from the drilling company a cash bonus plus an 'override' royalty, i. e. a share of the royalties received by the drilling company. To execute this plan, Oldham and Phelps agreed to form a group to be known as the Phelps Prospecting Company (herein called Phelps Prospecting), and to finance Phelps Prospecting, at least initially, Phelps was to solicit funds from his family and their friends.

Pursuant to this understanding with Oldham, Phelps then solicited and secured $4100 from members of his family and their friends ² during April, May and June, 1951. Neither Phelps nor Oldham contributed any funds. ³ All the funds raised--with the exception of Michael Phelps' $100--were deposited in Oldham's personal bank account and disbursed by him. From this fund expenditures were made for travelling expenses of Oldham and Phelps, a weekly salary of $50 for Phelps, an offce sign, stationery, stenographic services, business cards and other kindred items.

Coincident with the happening of these events, Oldham was engaged in the organization of a corporation called the Great Eastern Gas Corporation (herein called Great Eastern), eventually incorporated in Nevada on June 28, 1951. Certain of the appellees were given Great Eastern stock by Oldham, ⁴ while others purchased stock. ⁵ while there is some evidence that Great eastern's original purpose was to act as a drilling company, its later purposes were identical with those of Phelps Prospecting. Phelps cooperated with Oldham in some of the pre-incorporation promotional activities for Great Eastern and arranged for the purchase of Great Eastern stock by some of the appellees.

The Charleroi Mountain Club (herein called Club), the owner of approximately 850 acres of land in Elk County, in June 1951 advertised the fact that their land was available for leasing. Oldham, having learned of this advertisement, wrote a letter to an Attorney Silhol, the Club's attorney, inquiring about a possible lease. ⁶ Subsequently Phelps, at Oldham's suggestion, met with Attorney Silhol. Negotiations between Oldham, Phelps and Attorney Silhol culminated in the execution of a lease between the Club and Phelps Prospecting. The principal provisions of this lease, executed by Oldham on behalf of Phelps Prospecting, were: (1) Phelps Prospecting received the right to enter upon the Club's land 'to explore upon said land for the possibility of oil and/or gas production' for a six month period, with the right of renewal for an additional like period; (2) Phelps Prospecting agreed to secure responsible parties to lease the land to drill for oil and/or gas; (3) from such drilling company the Club would receive one-eighth (1/8) of all royalties realized from gas and/or oil produced from the land; (4) the drilling company was to drill a minimum of three wells; (5) Phelps Prospecting would secure compensation for its services from the drilling company and not from the Club.

Phelps and Oldham then contacted Keta Gas and Oil Corporation (herein called Keta), a drilling company, to perform the drilling on the property. Negotiations between Keta, Phelps, Oldham and Attorney Silhol finally resulted in the execution of an agreement between Keta and the Club. Under the terms of this agreement, Keta was to drill a minimum of three wells on the Club's land and the Club was to receive one-eighth and Keta seven-eighths of all royalties received from any gas or oil produced from the land.

After this agreement was executed, Keta's representative wrote to 'F. B. Oldham, Phelps Prospecting Company', at the latter's Buffalo, New York, office address, stating, inter alia: 'our agreement with you contemplates a payment of three thousand ($3,000) dollars and an override of one-eighth (1/8), in return for your services * * *'. Oldham, on Phelps Prospecting stationery, confirmed the agreement stating: '* * * this covers us very nicely'. At Oldham's instruction, Keta then paid the bonus check of $3,000 to Phelps Prospecting and agreed to pay the oneeighth (1/8) 'override' royalty to Great Eastern.

The kernel of the instant controversy is the agreement of Keta to pay the 'override' royalty to Great Eastern, rather than to Phelps Prospecting. Great Eastern contends that throughout all the negotiations, both with the Club and Keta, Oldham and Phelps acted as its agents, that the 'override' royalty belonged to it, that appellees knew that Great Eastern owned the 'override' royalty and, by their actions, confirmed Great Eastern's acquisition of it from Keta. On the other hand, appellees contend that they, as the group constituting Phelps Prospecting, were entitled to the 'override' royalty, that Dldham and Phelps acted as their agents and that they neither knew of, consented to nor ratified the acquisition of this asset by Great Eastern.

Appellees instituted this equity action ⁷ against Keta, Great Eastern and Phelps seeking the following relief: (1) a cancellation of the Keta-Great Eastern agreement concerning the 'override' royalty; (2) the execution of a new agreement between Keta and Phelps Prospecting concerning the 'override' royalty; (3) the payment of all future 'override' royalties to Phelps Prospecting; (4) the adjudication of Great Eastern as a trustee directed to account for and pay over to Phelps Prospecting all moneys received by it from Keta under the 'override' royalty agreement and (5) a direction that Phelps pay over the $3,000 bonus to Phelps Prospecting. After hearing, the chancellor granted the relief requested in (1), (2), (3) and (4), supra. Upon affirmantion of the chancellor's findings and conclusions this appeal was taken.

In reviewing this record, certain principles, well rooted in our law, are applicable: (1) the findings of a chancellor have the effect of a verdict of a jury and, when affirmed by the court en banc, will not be reversed if there is adequate evidence to sustain them and if they are not premised upon erroneous inferences and deductions drawn from the evidence: ⁸ De Luca v. De Luca, 388 Pa. 167, 130 A.2d 179; Mann v. Mann, 387 Pa. 230, 127 A.2d 666; Foulke v. Miller, 381 Pa. 587, 112 A.2d 124; Brown v. Rosenthal, 378 Pa. 77, 107 A.2d 569; Peardon v. Peardon, 365 Pa. 13, 73 A.2d 661; (2) on appeal from an equity decree the question is not whether the appellate court, upon the same evidence, would have reached the same conclusion, but whether the evidence is sufficient to support the conclusion reached by the chancellor who had the opportunity to see and hear the witnesses: Mann v. Mann, supra; Kalyvas v. Kalyvas, 371 Pa. 371, 89 A.2d 819; Quinn Coal Co. v. Scranton Anthracite Coal Co., 350 Pa. 21, 38 A.2d 77.

Appellants' first contention is that appellees did not sustain their burden of proving a joint venture known as Phelps Prospecting. A joint venture has been defined as a 'special combination of two or more persons, where, in some specific venture, a profit is jointly sought without any actual partnership or corporate designation': 30 Am.Jur., Joint Adventures, § 3. ⁹ The existence or non-existence of a joint venture depends upon what the parties intended in associating together. ¹⁰ It must arise from a contractual basis, although the contract need not be express but may be implied from the acts and conduct of the parties. ¹¹ To constitute a joint venture certain factors are essential: (1) each party to the venture must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, materials or money; ¹² (2) profits must be shared among the parties; ¹³ (3) there must be a 'joint proprietary interest and right of mutual control over the subject matter' of the enterprise; ¹⁴ (4) usually, there is a single business transaction rather than a general and continuous transaction. ¹⁵ The existence or non-existence of a joint venture depends on the facts and the circumstances of each particular case and no fixed nor fast rule can be promulgated to apply generally to all...