Pratt v. Shell Petroleum Corporation

• Decision Date: 07 February 1939
• Docket Number: No. 1678.,1678.
• Citation: 100 F.2d 833
• Parties: PRATT v. SHELL PETROLEUM CORPORATION.
• Court: U.S. Court of Appeals — Tenth Circuit

100 F.2d 833 (1938)

PRATT v. SHELL PETROLEUM CORPORATION.

No. 1678.

Circuit Court of Appeals, Tenth Circuit.

December 22, 1938.

Rehearing Denied February 7, 1939.

Austin M. Cowan and Mark H. Adams, both of Wichita, Kan. (W. E. Holmes, Howard L. Baker, Charles E. Jones, Edward F. Arn, C. A. McCorkle, W. A. Kahrs, and Robert H. Nelson, all of Wichita, Kan., on the brief), for appellant.

C. P. Berry, of St. Louis, Mo., and Joseph G. Carey, of Wichita, Kan. (Guy A. Thompson, Samuel A. Mitchell, Frank A. Thompson, Truman Post Young, and Calvin A. Brown, all of St. Louis, Mo., and George C. Spradling, of Wichita, Kan., on the brief), for appellee.

Before PHILLIPS, BRATTON, and WILLIAMS, Circuit Judges.

BRATTON, Circuit Judge.

This action was instituted by Shell Petroleum Corporation against E. S. Pratt, and for convenience reference will be made to the parties as they were denominated in the court below. The purposes of the action were to impress a trust upon certain mineral properties, and for an accounting.

Plaintiff is a corporation engaged on a large scale in the business of producing crude petroleum, refining it into manufactured products, and selling them in the market. In connection with such business, it explores and investigates land in respect to its geological and geophysical formation to determine the probability of its oil and gas content; and it acquires oil and gas leases in the State of Kansas directly from the owners of land or by assignment. Defendant is a geologist and he was in the employ of plaintiff from January 8, 1924, to September 30, 1934. His first employment was in the capacity of an instrument man; from January 1, 1925, to January 1, 1926, he served as core drill geologist with office at Ponca City, Oklahoma; from January 1, 1926, to January 1, 1927, he acted as geologist with office at Ponca City; from January 1, 1927, to February 15, 1928, his position was that of subsurface geologist with office at Ponca City; and from February 15, 1928, throughout the remainder of his employment, he was district geologist with office at Wichita, Kansas. As district geologist he was in charge of the geological work throughout Kansas, and all other geologists and field men worked under him and reported to him. His duties were to correlate the geological work done in his district, and to report upon it to his immediate superior, the division geologist at Tulsa, Oklahoma, with his recommendations and comments. His reports consisted of oral and written data of findings in the field, core drills, subsurface and otherwise, together with his conclusions based thereon. More than $900,000 was expended on core drilling in Kansas during the years 1927 to 1933, both inclusive, approximately $50,000 per year was expended for other geological information, and maps were made from the core drill reports and forwarded to the office in Tulsa. Valuable records, maps, data, and other geological information of a highly confidential nature were in his custody and under his control at the office in Wichita. He made recommendations in his capacity as district geologist in respect to the acquisition of leases in given locations within his district, and he also made recommendations concerning the location of test wells to be drilled on acreage on which plaintiff owned oil and gas leases. Sometime during the year 1924, he received a notice in writing from plaintiff as follows: "The instructions heretofore given to the effect that no one in the employ of the company is permitted to purchase oil and gas leases or any interest therein or royalties, either in his own name or in the name of another, are to be strictly adhered to, and a violation either of the letter or spirit of these instructions will result immediately in dismissal of the person guilty of such violation."

Despite the existing fiduciary relation and in violation of the notice, he secretly acquired during his employment thirty-eight separate mineral (royalty) interests, undivided interests in six separate oil and gas leases, and three separate overriding royalty interests, all in lands within his district; and he acquired one additional mineral interest less than thirty days after his employment terminated. In a majority of the transactions a consideration was paid in money, but in others he told an outside person that a certain area was likely territory, or that it was to be developed, or that a test well was to be drilled, or that plaintiff and the Gypsy Company were co-operating to sink a test well there; the outside person acquired mineral interests in reliance upon such information; and he then conveyed undivided parts thereof to defendant in return for the information supplied, and without other consideration. Thirty-one of such interests, leases, and overriding royalties were taken in the name of S. W. Tilden, six in the name of Jack R. Corzine, three in the name of Claude Kirk Heath, and six in the name of defendant. Tilden, Corzine, and Heath were fictitious names, there being no such persons. Defendant also entered into three drilling agreements providing for the drilling of test wells on land in which he and his associates owned leases. Ten of the mineral interests were conveyed to third persons prior to the institution of the suit, and plaintiff dismissed without prejudice as to five others. Defendant rented a postoffice box and had a bank account in the name of Tilden, and he obtained several loans from the bank in that name. Plaintiff paid him in the fictitious name of Tilden sums aggregating more than $25,000, representing proceeds from oil runs accruing to the mineral interests of record in that name. On two occasions he called the Tulsa office of plaintiff on long distance telephone and stated that Tilden had made inquiry concerning a check which had not arrived. Plaintiff first learned about September 30, 1934, that defendant had thus acquired and owned certain mineral interests; he was immediately discharged; and this suit followed.

The court entered a decree imposing a trust upon the several properties of record in the name of defendant and those of record in the fictitious names, ordering an accounting, and dismissing the counterclaim in which defendant sought to recover money which had been impounded, representing proceeds accruing from production properly allocated to such properties. Defendant was required to convey to plaintiff unencumbered those interests which he had acquired without payment of any consideration; and he was required to convey in like manner such of those interests which he had acquired upon payment of a consideration as plaintiff should elect in writing to take after the accounting had been completed, provided that such conveyance or conveyances should be made only upon plaintiff tendering into court the amount or amounts which, added to that received by defendant by way of royalty or royalties or otherwise by virtue of his apparent ownership of such interests, would equal the amount or amounts that he had paid for such interests. Other provisions were made in relation to the accounting but it is unnecessary to detail them. The appeal is from that decree.

The first contention advanced is that since the notice in writing provided that the penalty for its violation would be dismissal there is no basis for a constructive trust. The notice recited that no employee should purchase oil and gas leases or royalties, and that any one violating it would be immediately discharged; but it did not recite directly or indirectly that such discharge would be the only penalty invoked or that other remedies would not be sought. There is nothing in the notice or elsewhere to indicate that the notice was intended, regarded, or treated as a waiver or surrender of any equitable remedy open to plaintiff for its transgression. It cannot be successfully maintained that the notice excluded any remedy to which plaintiff could otherwise have resort.

The next contention is that plaintiff should not prevail for the reason that in the acquisition of the royalty interests defendant did not engage in any business or undertaking which was competitive in character with that of plaintiff. Plaintiff acquired oil and gas leases either directly from the owner or through assignment. Defendant acquired interests in six separate leases, and he and his associates made three separate drilling contracts. In some instances, plaintiff owned the lease and defendant a fractional part of the interest in the same land but in most instances their interests were in different lands situated in the same territory. In two instances, defendant acquired interests in oil and gas leases which plaintiff had sought to acquire but without success. There was testimony that early in 1928 defendant recommended that plaintiff acquire certain royalty interests and was advised that the recommendation had been rejected, and that in the future he should confine his activities to recommendations for the acquisition of leases; and he acquired the mineral interests in suit after that time. An agent may traffic for his own advantage and benefit outside the scope of the business of his principal without being accountable for the profits realized. Latta v. Kilbourn, 150 U.S. 524, 14 S.Ct. 201, 37 L.Ed. 1169. The inhibition is upon dealing with the subject-matter of the agency and making use of information acquired while acting within the scope of the agency. It is infidelity of that kind with opportunity of detriment to the principal that subjects the unfaithful agent to liability for the gains and profits. Ogallah Elevator Co. v. Harrison, 97 Kan. 289, 154 P. 1016, L.R.A.1916D, 777; More v. Burroughs, 111 Kan. 28, 205 P. 1029. Here defendant was employed and placed in a position of the highest trust and confidence because of his peculiar fitness to obtain geological and geophysical information, and then to reach an intelligent conclusion based upon it in respect to the existence...