Pan American Petroleum Corporation v. Orr

• Decision Date: 28 June 1963
• Docket Number: No. 20377.,20377.
• Citation: 319 F.2d 612
• Parties: PAN AMERICAN PETROLEUM CORPORATION, Appellant, v. B. B. ORR and W. R. Henderson, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

319 F.2d 612 (1963)

PAN AMERICAN PETROLEUM CORPORATION, Appellant, v. B. B. ORR and W. R. Henderson, Appellees.

No. 20377.

United States Court of Appeals Fifth Circuit.

June 28, 1963.

J. K. Smith, Fort Worth, Chas. F. Potter, Tyler, Tex., for appellant.

Fred Erisman, Longview, Fred B. Werkenthin, Austin, Thomas W. Hathaway, Tyler, E. M. DeGeurin, Austin, Ben Johnson, Tyler, Tex., for appellees.

Before HUTCHESON, GEWIN and BELL, Circuit Judges.

GEWIN, Circuit Judge.

This is a slant-hole case; and the first one to reach this court. Pan American Petroleum Corporation¹ filed suit in the United States District Court for the Eastern District of Texas against B. B. Orr and W. R. Henderson to recover the value of oil and gas produced by defendants through two slant-holes. The defendant B. B. Orr was the lease operator and W. R. Henderson a working interest owner. It is undisputed that these defendants (appellees) produced oil and gas through two slant-holes surfaced on their lease, but bottomed under plaintiff's lease. The period involved began in 1948 and continued to 1962, when both wells were surveyed and shut in. Pan Am recovered a judgment, but its recovery was restricted to the amount of oil proved to have been taken within the two years next preceding the filing of the complaint.

Pan Am contends that its motion for an instructed verdict should have been granted, because the evidence showed as a matter of law that the two year statute of limitations was tolled under the facts proven; that Pan Am acted with reasonable diligence in making an investigation without discovering the fraud alleged; and that its investigation was effectively blocked or prevented by the acts of fraudulent concealment on the part of the defendants which lulled the plaintiff and reassured it that no fraud existed. The trial court refused to grant plaintiff's motion for judgment after the jury verdict was returned and denied its motion for a new trial.

The following broad, general rules are applicable in the circumstances of this case: (a) the two year statute of limitations is the appropriate limitation statute to be considered;² (b) limitation does not run and the statute is tolled in circumstances where the cause of action has been fraudulently concealed by the defendant and is not discovered by the plaintiff two years before filing suit if the plaintiff exercised reasonable diligence in seeking to discover the fraud after being put on inquiry;³ and (c) even if there is fraudulent concealment by the defendant, the plaintiff is required to act with diligence in seeking to discover fraud after being put on inquiry; and if it failed to do so under all of the facts and circumstances of the case, the statute will not be tolled.⁴

The chief contention of Pan Am is that while it was possessed of sufficient facts to put it on inquiry as to the fraud involved, the conduct of the defendants was such that Pan Am was relieved of its duty to make further inquiry; and because its inquiry and investigation was blocked, diverted, thwarted and stopped by the trickery, stealth, fraudulent and dishonest conduct of the defendants. Thus it is claimed by Pan Am that the evidence showed as a matter of law that the statute was tolled and consequently there is no evidence to support the jury's verdict that it did not act with reasonable diligence as required by law.⁵

Accordingly, we come to the narrow question of whether there was sufficient evidence to submit the case to the jury touching the issues of fraudulent concealment by the defendants, knowledge on the part of Pan Am sufficient to put it on inquiry, and whether Pan Am acted with reasonable diligence in seeking to discover the fraudulent conduct of the defendants in light of all of the conduct of the defendants. We conclude that there was sufficient evidence on all issues involved to authorize a submission of those issues to the jury. The case was submitted to the jury on specific interrogatories which brought into sharp focus the fact issues to be decided. The jury clearly and repeatedly answered that by the exercise of reasonable diligence Pan Am could have ascertained the existence of fraud on the part of the defendants in all reasonable probability before the two year period next preceding the filing of the complaint. In deciding this case we are sitting as a Texas court. It is not within our province to approve or disapprove, or to refuse to apply the applicable rules of law because of the revolting and unsavory conduct of the defendants. We are bound by Texas law.⁶

Since the case was argued orally, Pan Am has filed a supplemental brief in which it contends that the defendants are estopped to make the defense that Pan Am could not rely on the defendants' fraudulent conduct, and from asserting that Pan Am was under a duty to make further inquiry. As Pan Am forthrightly asserts in its original brief, the myriad of cases on the subject of fraud present a vast labyrinth of decisions reaching varied results.⁷ The cases cited by Pan Am in its supplemental brief deal largely with fact situations where the fraud involved induced the transaction complained about, and such fraud was an inherent ingredient of the transaction. The rules of law in the cases cited, under the facts in those cases, do not conflict with the rules herein set forth. Not all, but many of the cases cited in the supplemental brief deal with fraud in the sale or exchange of property, a fiduciary relationship, or fraudulent representations made to obtain the execution of a contract. Pan Am admits in its summary of the cited cases that an alleged fraudulent representation should not be relied on in circumstances where the representation itself causes suspicion.

While we have concluded not to undertake a cataloging of the evidence for the reasons hereinafter set out, it does seem appropriate to mention the fact that Pan Am relies very heavily on the directional survey made by Houston Oil Field Material Company (Homco), a reputable, reliable concern, not given to fraud. It is contended that there were no suspicious circumstances connected with the directional survey. Undoubtedly, the directional survey was an honest one. On the other hand, there are circumstances connected with it which clearly show that there were ample reasons to lead Pan Am to the conclusion that it should not rely blindly on the survey. The survey in question was completed on June 17, 1957, which was 17 days before the well was completed on July 4, 1957. While Pan Am admits this lapse of time, it makes the following contention:

"But it appeared that this much time might be required for such completion operations as running casing, cementing, shooting, squeezing, making connections, and a myriad of things, especially if a little trouble was encountered."

Apparently, Pan Am assumed that all drilling had been completed when the directional survey was made. As a matter of fact however, Railroad Commission Form 2 showed that drilling was commenced on June 12, 1957, and that drilling was completed on July 4, 1957. Of more importance is the letter of L. H. Carroll, a qualified geologist in the employ of Pan Am, dated August 1, 1957, directed to Pan Am a month and 13 days after the directional survey. This letter alone is sufficient to arouse suspicion and give Pan Am ample reason to know that it should not wholly rely on the directional survey, however honestly made. The letter will be set forth in the margin.⁸ As will be seen from a reading of the letter, a number of suspicious circumstances are outlined, but more important is the following statement:

"We conclude that all evidence strongly indicates that the Orr well has been whipstocked to the west and probably is draining oil from Pan American\'s Lease No. 32422." (Emphasis supplied.)

Statutes of limitation are based upon sound policy considerations. Such policy considerations applicable in the State of Texas are to be determined by the Legislative Branch of the Government of that State. It may be true that every time a statute of limitations bars a meritorious cause of action a wrongdoer profits from his own wrong, but the statute applies to those who do right and those who do wrong with equal force. As pointed out by the Supreme Court in Pendergast v. United States, 317 U.S. 412, 418, 63 S.Ct. 268, 270-271, 87 L.Ed. 368 (1943):

"Every statute of limitations, of course, may permit a rogue to escape."

Again the Supreme Court spoke on the subject in Chase Securities Corp. v. Donaldson, 325 U.S. 304, 314, 65 S.Ct. 1137, 1142, 89 L.Ed. 1628 (1945):

"Statutes of limitations find their justification in necessity and convenience rather than in logic. They represent expedients, rather than principles. They are practical and pragmatic devices to spare the courts from litigation of stale claims, and the citizen from being put to his defense after memories have faded, witnesses have died or disappeared, and evidence has been lost. (Citing authority) They are by definition arbitrary, and their operation does not discriminate between the just and the unjust claim, or the avoidable and unavoidable delay. They have come into the law not through the judicial process but through legislation. They represent a public policy about the privilege to litigate."⁹

This is a case where the evidence is voluminous and conflicting, but the applicable law is clear. The record on appeal contains almost 1,300 pages of evidence. A summary of it would extend this opinion to undue length and would not accomplish any useful purpose. It is sufficient to say that a review of the record convinces us that the jury was amply supported by substantial evidence in deciding that the plaintiff did not meet the required standard of diligence. The evidence was in irreconcilable conflict, and such evidence clearly supports conflicting inferences and conclusions. In such circumstances, it is the function of the jury to make a choice. Our agreement...