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Lowdermilk v. Ohio Oil Co.

: April 6, 1953.


Author: Major

Before MAJOR, Chief Judge, and DUFFY and LINDLEY, Circuit Judges.

MAJOR, Chief Judge.

Sullivan Petroleum Corporation (sometimes referred to as Sullivan), an Indiana corporation, was organized in August 1941, to deal in oil and gas properties and to drill and operate wells thereon. Plaintiff, since April 20, 1943, has been the qualified and acting Receiver for Sullivan by order of the Circuit Court of Sullivan County, Indiana. Defendant, Ohio Oil Company (sometimes referred to as Ohio), an Ohio corporation, was and is engaged in the business of producing and marketing oil and gas.

The instant action was commenced in the Marion Superior Court of Marion County, Indiana, on April 26, 1950, to recover the proceeds from oil produced and sold by defendant from two wells, with interest thereon, on the ground that the oil was wrongly converted by defendant to its own use. Upon defendant's petition showing diversity of citizenship with the requisite amount in controversy, the action was removed to the District Court of the United States for the Southern District of Indiana, Indianapolis Division. Defendant asserts title to the wells and the oil produced therefrom by virtue of written assignments of two leases covering the premises on which the wells are located. Plaintiff contends that the assignments were invalid for lack of consideration and because made in violation of the express statutory limitation upon the powers and authority of the officials of Sullivan. The written assignments were attached to and made a part of the complaint. Defendant filed an answer and submitted affidavits. Neither the complaint nor answer was verified. Upon defendant's motion, the court, on February 21, 1952, entered a summary judgment in its favor on the ground that there was no genuine issue as to any material fact and that the defendant was entitled to a judgment as a matter of law. From such judgment plaintiff appeals.

The complaint alleges that immediately upon incorporation Sullivan acquired by assignment from the lessees certain oil and gas leases and drilling equipment, and that two of such leases, designated by the names of their landowner-lessors as the Poe and Hayden leases, were of great value; that on April 1, 1942, the only property of any value possessed by Sullivan was the right of mining for and producing oil and gas from the land described in these two leases, together with certain drilling equipment and a partly drilled well on the Poe lease (called the Poe well), which on that date had reached a depth of some 1,700 feet; that on April 1, 1942, defendant "induced the President and Secretary of Sullivan * * *, by means to the plaintiff and Sullivan * * * unknown, but well known by defendant, to agree to transfer and assign to defendant * * * the Albert Poe lease, together with the Poe well, without payment to Sullivan * * * of anything therefor, and without agreeing to pay anything therefor, and without promising anything therefor * * * together will all other property of Sullivan * * * excepting said drilling equipment of nominal value."

The complaint alleges that on the 26th day of April, 1942, "pursuant to said arrangement," Sullivan made and delivered a written assignment of the Poe lease and the Poe well to the defendant, and that on April 27, 1942, "pursuant to said arrangement," Sullivan made and delivered a written assignment of the Hayden lease to defendant but that they were without consideration, although it was shown that if defendant drilled on the Hayden lease and produced oil therefrom, Sullivan was to receive as royalty a one thirty-second part thereof.

The complaint alleges that the defendant continued with the drilling of the Poe well until it reached a depth of about 2,300 feet, where oil was found in large quantities, and that defendant drilled a well upon the Hayden lease, where oil was likewise discovered in large quantities. It alleges that the defendant has received from the sale of oil from each of these wells the sum of $750,000 (a total of $1,500,000). Recovery was sought for this amount on the ground that plaintiff and not defendant was the owner of both the Poe and Hayden wells and that defendant had wrongfully appropriated to its own use the oil produced therefrom. It is admitted by the complaint that payment has been made for a one thirty-second part of the oil produced from the Hayden well, which payment plaintiff tendered as a credit upon any sum found owing by the defendant.

The Poe assignment was executed on April 26, 1942, and recites that Sullivan "for and in consideration of the sum of One Dollar ($1.00), receipt of which is hereby acknowledged, and other good and valuable consideration, does hereby bargain, sell, transfer, assign and set over" to Ohio certain described oil and gas leases, including Poe. The instrument recites that Sullivan, for the same consideration, assigned and set over to Ohio "that certain test well for oil and gas now located on the premises above described * * * together with the casing now in said well." Ohio agreed that if drilling resulted in a dry hole, it would "pull from said well all casing therein which can be pulled through ordinary methods" and would deliver the same to Sullivan on the premises described. Ohio also agreed that in the event of a dry hole, "it will plug said well in accordance with the laws, rules and regulations of the State of Indiana," and further, that if the drilling operations resulted in a producing oil or gas well, it would deliver to Sullivan casing of the same kind and value as that then located in the well or that it would pay Sullivan the market value of casing of like grade and quality. It was provided that unless Ohio commenced or caused to be commenced operations for the deepening of the Poe well on or before June 1, 1942, and prosecuted the same with due diligence to a depth at which the formation commonly known and referred to as the Niagara Limestone might reasonably be expected to occur, the assignment and all rights thereunder should terminate as to both parties and "the oil and gas leasehold estate herein assigned shall revert" to Sullivan, its successors and assigns. The instrument concludes with the covenant that Sullivan was the lawful owner of and had good title to the lease and property assigned, and that all conditions necessary to keep the lease in full force had been duly performed.

The Hayden assignment was executed April 27, 1942, the day following the execution of the Poe assignment, and covered a lease dated June 21, 1940, for a 40-acre tract, and two other leases dated June 6, 1940, for tracts of 20 and 46 acres. The phraseology of this instrument differed from that of the Poe assignment by providing for delivery to Sullivan of an overriding royalty of one thirty-second part of the oil and gas produced upon the Hayden land. It also provided that unless Ohio should on or before the 1st day of June, 1942, commence or cause to be commenced operations for the deepening of the Poe well (covered by the Poe assignment) and prosecute said operations with due diligence to a formation commonly known as the Niagara Limestone, the assignment should terminate as to both parties and the estate should revert to Sullivan. This assignment also differed from that of Poe by providing that if oil was found in the Poe well in paying quantities at a lesser depth than that at which the Niagara Limestone might reasonably be expected to occur, the condition for deepening the Poe well should be considered as fully met and complied with.

It appears pertinent at this point to note that Sullivan and Ohio, on April 25, 1942, executed a "rental contract" agreement by which Sullivan rented to Ohio certain described drilling equipment and tools then located on the property described in the Poe assignment. By this agreement Ohio obligated itself to pay so much per day for a designated period of time for the use of such equipment. Ohio agreed that it would not remove such machinery and equipment from the Poe property without the written consent of Sullivan and the latter agreed that upon termination of the agreement, it would promptly remove said machinery and equipment from the Poe property and, in such event, that Ohio would be relieved of all obligations under the agreement.

In the view which we take of the case, we think it unnecessary to relate in detail the allegations of the lengthy answer interposed by defendant. It is denied that plaintiff is the owner of the Poe well or is entitled to the proceeds from the oil produced therefrom, and it is asserted that the defendant performed all the terms and conditions imposed upon it by both assignments, including the actual payment of the $1.00 mentioned as consideration, payment to plaintiff of the overriding royalty provided for in the Hayden agreement, payment to plaintiff of the value of the casing located in the Poe well at the time of the execution of the Poe assignment, and payment to plaintiff of the rental provided for in the rental contract for the use of Sullivan's machinery and equipment in deepening the Poe well. Defendant in its answer also relates in considerable detail certain court proceedings to which plaintiff was a party in the State courts of Indiana, by reason of which defendant alleges that plaintiff is estopped to assert that the Poe assignment is invalid for want of consideration or for any other reason. For reasons subsequently to appear, we shall not set forth the allegations of the answer in this respect.

The issues involved in this litigation have dwarfed materially since its inception. Plaintiff apparently has abandoned, at any rate it is no longer contended, that the Poe and Hayden assignments were executed by the officials of Sullivan in violation of their authority. And in the enumeration of points to be relied upon by the plaintiff in this court, it is stated, "The plaintiff renounces all claims made by it as stated in its complaint herein and which are founded upon the Hayden assignment." Thus, the sole contested issue remaining in the case is whether the Poe well and the oil produced therefrom is and was the property of the plaintiff or that of the defendant. Or, as stated by plaintiff in his brief, "The particular issue is the ownership of the right to produce and market oil from a particular oil and gas lease known as the Albert Poe. This question of ownership is dependent upon two writings, exhibits A and B herein, called assignments. Plaintiff contends that defendant acquired no right to produce the oil from the Albert Poe lease by these writings, while the defendant contends that it did."

As already noted, it is not disputed, in fact it is conceded, that Ohio has performed all conditions contained in both assignments with the exception that it is claimed by plaintiff that the Poe well was not drilled to the Niagara Limestone formation. It is also pertinent to note that there is no allegation in the complaint and no contention that Ohio practiced any fraud or deception upon Sullivan in the procurement of the assignments or that they were entered into other than at arm's length. True, it is alleged that Ohio induced the officials of Sullivan to make such assignments without consideration. This allegation is in the nature of a conclusion and, in any event, falls far short of charging Ohio with fraud or deception.

It is apparent from what has been said that plaintiff has had a difficult time in selecting a position upon which to take a firm stand. Recovery was first sought upon the ground that the assignments were void because they were executed without corporate authority on the part of Sullivan and that plaintiff was entitled to recover the proceeds from oil produced and sold from both Poe and Hayden. Not only has that position been abandoned, but the right to recover the proceeds from oil produced and sold from Hayden has been disclaimed. Even now we have difficulty in discerning the precise basis upon which plaintiff seeks to recover for the oil produced and sold by Ohio from the Poe well. Plaintiff, however, appears to recognize that the assignments were valid options by which Ohio acquired the right to prospect for oil, but contends that having acquired such right and having elected to perform the conditions enumerated, it did not acquire title to the Poe premises or the oil produced from the Poe well. It is well to keep in mind that under ...

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