Watchorn v. Roxana Petroleum Corporation

• Decision Date: 07 March 1925
• Docket Number: No. 6471.,6471.
• Citation: 5 F.2d 636
• Parties: WATCHORN v. ROXANA PETROLEUM CORPORATION.
• Court: U.S. Court of Appeals — Eighth Circuit

5 F.2d 636 (1925)

WATCHORN v. ROXANA PETROLEUM CORPORATION.^*

No. 6471.

Circuit Court of Appeals, Eighth Circuit.

March 7, 1925.

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Cleon Headley, of St. Paul, Minn., and John Embry, of Oklahoma City, Okl. (Embry, Johnson & Tolbert, of Oklahoma City, Okl., and Davis, Severance & Morgan and C. A. Severance, all of St. Paul, Minn., on the brief), for plaintiff in error.

John J. Yowell and Truman P. Young, both of St. Louis, Mo. (Koerner, Fahey & Young, of St. Louis, Mo., on the brief), for defendant in error.

Before SANBORN and KENYON, Circuit Judges, and BOOTH, District Judge.

KENYON, Circuit Judge (after stating the facts as above).

Plaintiff claims the contract was an agreement upon the part of defendant to reimburse plaintiff's assignor in the amount of $250,000 out of a fund to be created by due and proper development for gas of the various tracts of land covered by said contract, in case plaintiff did not complete the purchase of the oil rights as provided therein; that defendant failed to make such development, and consequently is liable for the full amount of the $250,000 paid to him under the terms of the contract.

Defendant claims that the contract created no debt as to him; that the $250,000 was in fact paid for an option to secure the oil rights in the premises, and not advanced for the purpose of developing gas; that the production of gas is the contingency upon which any obligation of defendant to pay rests; that is not an agreement to develop or repay as an alternative; that defendant's agreement is to duly and properly develop the lands for gas, and that if he has failed so to do plaintiff's action should be one for damages based on breach of contract and not to recover the $250,000; that the $250,000 could be recovered only if plaintiff shows that, had defendant made proper development of the premises for gas, funds would have been derived therefrom, out of the first 50 per cent. of which, less rents and royalties, plaintiff could have paid said amount to defendant. There was no effort made in the case so to do.

The court held that the contract was an obligation to develop the premises for gas as a means of repaying the plaintiff money paid to defendant; that nothing less than actual drilling on each parcel of land covered by the contract would constitute a compliance therewith. It refused to permit the defendant to introduce evidence of experts as to what in their judgment would be due and proper development of the lands for gas, and held that it was not necessary for plaintiff to prove damages; that the evidence failed to show due and proper development; and that the whole sum of $250,000 paid to defendant by plaintiff's assignor under the terms of the contract, by virtue of defendant's failure to make such development, became a debt due and owing to plaintiff from defendant. The court's view of the construction of the contract is clearly shown in a discussion between the court and counsel as follows:

"By the Court: I think that is clear now, and that testimony is refused. In other words, this contract requires development, and it seems to me that without actual development you didn't perform the contract.

"By Mr. Johnson: In view of that statement, what should we have developed?

"By the Court: All of this land.

"Mr. Johnson: We should have drilled a hole on each of the tracts of land?

"By the Court: Certainly. No one could know whether gas was on any tract of land without development. You can't take the plaintiff's money and keep it and say that it wouldn't have been of any value to develop this land and rested at that. You are required to develop the land. I think your offer is complete." (Record, p. 225.)

Some controversy is suggested in argument as to the theory on which recovery is sought. During the progress of the trial, question arising as to this, counsel for plaintiff stated:

"Mr. Young: Your honor, during Mr. Embry's argument it occurred to me there was some confusion regarding this matter. We are not suing here for an accounting. We are not suing for what that contract entitled us to if we conceived that Mr. Watchorn complied with his contract. We are suing for failure to comply, and therefore we say there is an absolute obligation to pay the full amount now."

In discussing the nature of defendant's liability, counsel for plaintiff, on page 115 of their brief, state: "Where one has received money upon the faith of a contract which he thereafter fails to perform, the party who has advanced the money has the right to rescind the contract and sue for the money so paid. The law in such case creates an implied contract or obligation to return the money." And again, on page 117 of the brief: "Cases, therefore, which deal with the subject of the defendant's right in case of a breach of contract, to recover the consideration paid on rescission of the contract, or to sue for damages on affirmance thereof, have no bearing upon the specific question presented here." A number of times it is claimed in plaintiff's brief that this is a suit for money had and received. Possibly plaintiff's theory is best expressed by the statement, on page 119 of its brief, as follows: "The defendant having received the money and having failed to perform the contract, the law will create the implied obligation to return it, and a suit in the nature of a common-law action in assumpsit may be maintained. The plaintiff in such a case does not have to rely upon any specific provision in the contract making the defendant personally liable for the debt; the law creates the liability on account of defendant's failure to perform his part of the contract. This would be true even if the $250,000 obligation had not arisen out of an actual advancement of that sum." Again, page 120: "That being so, it is certainly clear that this implied obligation will arise upon defendant's breach of contract where he has actually received the money sued for and has agreed that said money shall be returned out of a fund to be created by him."

The nature of the action is important as bearing on the legal principles to be applied. This suit cannot succeed as an action upon a rescission of the contract to recover the original consideration as money had and received, for a number of reasons, viz.:

(a) Plaintiff's assignor received, and defendant parted with, valuable rights under the contract. For six months plaintiff or its assignor had the privilege of experimenting on, and testing, the lands to see whether oil could be developed. Defendant was excluded from making any arrangements with regard to said property as to oil or gas rights from June 30, 1916, to January 1, 1917. The $250,000 would have been a part of the purchase price for the oil rights if the option to take them had been exercised by the payment of $750,000 additional. Whatever the rights secured by this payment may be designated, they were in the nature of an option or a payment for the privilege of securing an option, and were of possible great value. The letter, Exhibit A in the record, from Mr. Gracht, representing and authorized to speak for the Roxana Petroleum Company, to Mr. Watchorn, throws light, not only upon the supposed value of the gas rights, but also upon the nature of the contract it was intending to make. In it appears this:

"On a payment of $250,000.00 cash made within one week after the acceptance of this agreement, Roxana Petroleum Company shall receive an option to purchase the oil rights on the leaseholds above referred to, with the exception of the E. ½ of N. W. ¼ of 4 — 22 — 3 E. (which 80 acres is wholly excluded from this deal), for an additional payment in cash of $750,000, to be exercised within six months from the date of acceptance of said option." (Record, p. 41.)

The word "option" is used also with reference to an additional payment of $1,500,000 to cover both oil and gas rights, instead of the $750,000 as follows: "It is under stood that in case we exercise either of these options, you will not during the six months provided for taking it up enter into any contract or agreement regarding the gas produced from said premises." Again in said letter it is stated, "It is agreed that in case we exercise the above option by Saturday next." At other places through the letter the frequent use of the term "option" is found. The money certainly was not paid by plaintiff's assignor for development of gas, and while it is not possible to determine what part of the consideration was given for the right to secure an option as to oil, it is apparent that was the important part thereof. The purpose of the negotiations and contract on the part of plaintiff's assignor was to secure oil rights if, in its judgment, they were sufficiently valuable, and to reap profit therefrom.

In view of the fact that the contract had been partially executed and plaintiff or his assignor had received substantial benefit therefrom, that defendant had done his part thereunder, at least outside of the question of due and proper development, and parted with valuable rights which plaintiff could not return, in other words, could not place him in statu quo, there could be no rescission because of defendant's failure to completely perform his contract. German Savings Inst. v. De LaVergne Refrigerating Mach. Co. et al., 70 F. 146, 17 C. C. A. 34; Gile v. Inter-State Motor Car Co., 27 N. D. 108, 145 N. W. 732, L. R. A. 1915B, 109. See authorities note, 30 L. R. A. 33.

(b) The duty to develop for gas is a covenant incidental to the main consideration of the contract. The $250,000 was paid as a part of the purchase price of the oil rights if the deal was consummated. It was not to be returned, except upon the happening of a certain contingency and in a certain way. The right to discover whether oil was on these premises in sufficient quantities to pay for developing was exercised by the plaintiff. That part of the contract was substantially...