Shamrock Oil and Gas Co. v. Ethridge, Civ. No. 5158.

• Decision Date: 07 March 1958
• Docket Number: Civ. No. 5158.
• Citation: 159 F. Supp. 693
• Parties: SHAMROCK OIL AND GAS CO., a Corporation, Plaintiff, v. J. E. ETHRIDGE, Individually and as Administrator of the Estate of H. E. Wood, deceased, and J. E. Ethridge and H. E. Wood doing business as Sterling Fishing Tool Co., a Co-partnership, Defendants.
• Court: U.S. District Court — District of Colorado

159 F. Supp. 693

SHAMROCK OIL AND GAS CO., a Corporation, Plaintiff, v. J. E. ETHRIDGE, Individually and as Administrator of the Estate of H. E. Wood, deceased, and J. E. Ethridge and H. E. Wood doing business as Sterling Fishing Tool Co., a Co-partnership, Defendants.

Civ. No. 5158.

United States District Court D. Colorado.

March 7, 1958.

William A. Riner, Jr., Cheyenne, Wyo., Holme, Roberts, More, Owen & Keegan and Donald C. McKinlay, Denver, Colo., for plaintiff.

Fred E. Neef, Rendle Myer and Robert Swanson, Denver, Colo., Kreager & Sublett and Ben D. Sublett, Sterling, Colo., for defendant.

ARRAJ, District Judge.

This is an action in replevin and to establish the ownership and right of possession to portions of an oil well drilling rig and certain accessories. The answer contains a general denial and affirmative defenses of estoppel, good faith purchase for value without notice, failure to state a claim upon which relief can be granted, non-compliance with the corporation laws of Wyoming by plaintiff on two different grounds, alter ego, and that there was a joint venture between R. H. Phillips and the plaintiff. Defendants also filed a counter claim seeking damages for the alleged unlawful taking of the property by plaintiff.

Because the doctrine of alter ego is involved in this action, it seems advisable to relate the pertinent facts in considerable detail; these facts are as follows:

Plaintiff, Shamrock Oil and Gas Co., was incorporated in May of 1950, in Wyoming by R. H. Phillips and one Maurer and one Eastman. At the first meeting of the Board of Directors, a qualifying share of stock of the par value of $1 was issued to each of the incorporators; no actual consideration was passed for such shares. At that time Phillips was the owner of the rig in question and, shortly after the incorporation, he leased the rig to the corporation for a rental fee of 50% of the proceeds received for drilling any wells; Phillips was to operate the rig on behalf of the company. It does not appear that the company ever received anything for the operation of the rig. At about the same time, Phillips transferred his interest in some 13 oil and gas leases to the corporation, without consideration; those leases were apparently dropped in December of 1950, through failure to pay delayed rentals. The only evidence of either of the above transactions was the minutes of the meetings of the Board of Directors.

Between May 16, 1950, and September 6, 1950, the corporation maintained a bank account in the Converse County Bank at Douglas, Wyoming; on September 6, 1950, the closing balance of that account was $43.42, which amount was transferred to Phillips' personal account. That is the only bank account the corporation ever maintained.

On August 27, 1951, Phillips gave a bill of sale to the drilling rig and accessories to the corporation in exchange for 90,328 shares of stock. Phillips, doing business as Phillips Drilling Company, continued to operate the rig under a lease from the corporation whereby he was to share the net profits from its operation equally with the corporation. This lease was not in evidence and the corporation minutes alone reflect its terms. Phillips is president of the Shamrock Oil and Gas Co. and has been ever since the first meeting of its Board of Directors.

In the spring of 1954, Phillips was drilling with the rig in Cherry County, Nebraska, and during that time he employed the defendant Ethridge and his former partner, doing business as Sterling Fishing Tool Company, to fish some tools out of a well and to perform other services to recover circulation in the well being drilled by him. Being unable to collect their account, aggregating approximately $9,000, the Fishing Tool Company brought an action in the District Court of Cherry County, Nebraska, to recover its claim. At the same time they caused an attachment to be issued against portions of the drilling rig at the well site.

Upon trial of the case in that Court, the Fishing Tool Company obtained judgment against Phillips for $9,257.68. A sheriff's sale was then held and the defendants in the instant case bought in portions of the rig against their judgment and the judgment was thus satisfied; no appeal was taken from this judgment. The Fishing Tool Company then removed the property to Sterling, Colorado. Shortly thereafter, Phillips, acting for the corporation, obtained possession of the property under a writ of replevin issued in the present case. The property was moved by him from Sterling, Colorado, to Wyoming; and it is now located at Casper, Wyoming. Since obtaining possession of the property it has been used by Phillips in drilling operations for the corporation.

Up to the time of trial there were only 90,331 shares of stock of the Shamrock Oil and Gas Co. outstanding; and at all times subsequent to the sale of the rig, R. H. Phillips was the owner of 90,328 of such shares. Apparently, no written reports were ever made by Phillips to the Board of Directors of the corporation concerning the operations of the drilling rig during the period that he had purportedly leased it from the corporation. The Federal Income Tax Returns filed by Phillips (jointly with his wife) for the years 1951, 1952, 1953, and 1954, reveal that he personally claimed the following as deductions from his gross income: (1) depreciation on the drilling rig, (2) expenses of maintaining and repairing the rig, and (3) promotional expenses in obtaining drilling contracts.

The profit and loss statements attached to Phillips' individual returns for these years show a profit on the rig operation of $4,867.61 for 1951, $4,362.07 for 1952, and $4,671.12 for 1953, but the corporation never received any part of those profits. Actually, the corporate minutes reflect that Phillips' financial statements to the corporation showed no profit was earned during each of these years. His return for 1954 shows a loss on the rig operation of $35,280.88, and this too was not shared with the corporation.

Except for the leases mentioned above, the rig and its accessories were the only corporate assets, and apparently the corporation had no business activity apart from Phillips' drilling operations with the rig. Although Phillips stated that the corporation had had a set of corporate books, he was unable to produce them, and it appeared doubtful that the corporation had at any time filed any federal corporate income tax returns.

At the close of plaintiff's evidence, defendants moved to dismiss the complaint on the question of damages claimed by plaintiff; that motion was granted by the Court.

The major premise upon which defendants relied at the trial was that plaintiff was merely the alter ego of R. H. Phillips; and in view of the conclusion reached by the Court on this defense, no decision is necessary on the other affirmative defenses set out in the answer.

It is aptly stated by the Court in Carlesimo v. Schwebel, 87 Cal.App.2d 482, 197 P.2d 167, 172:

"The laws as to when the courts will pierce the corporate veil are easy to state, but hard to apply."

Although a corporation is ordinarily regarded as a legal entity separate and distinct from its members, there is today no doubt that this fiction of a separate existence may be disregarded and the acts of the members treated as acts of the corporation where circumstances warrant it. As a general statement of this principle, it is said in 18 C.J.S. Corporations § 6, P. 376 that,

"It is clear that a corporation is in fact a collection of individuals, and that the idea of the corporation as a legal entity or person apart from its members is a mere fiction of the law introduced for convenience in conducting the business in this privileged way. It is now well settled, as a general doctrine, that, when this fiction is urged to an intent not within its reason and purpose, it should be disregarded and the corporation considered as an aggregation of persons, both in equity and at law.

"As is shown in § 7b infra, fraud is a common ground on which the courts will ignore the corporate structure, but actual fraud is not necessary. In addition to actual fraud, the courts will discard the corporate fiction whenever its retention would produce injustices and

...