Deep Oil Development Co. v. Cox , 1949 Tex. App. LEXIS 2188 ( 1949 )

HALL, Justice

(dissenting).

In 1937 the Deep Oil Development Company reorganized and secured a charter from the State of Texas covering one million dollars capital stock, divided into 40,000 shares. On November 20 of the same year the stock was increased by stock dividend to two million dollars. On April 4, 1938, the Company increased its shares to 400,000 at a par value of $5.00 per share. The corporation was formed for the purpose of buying, selling, storing and transporting oil, gas, salt brine and other mineral solutions, to own pipe lines and all other general equipment necessary to operate producing oil wells. The term of the charter was to run for fifty years. A portion of Section 5 of Article V of the charter is as follows: “The president shall be the chief executive officer of the corporation; he shall preside at all meetings of the stockholders and directors; he shall have general and active management of the business of the corporation, and shall see that all orders and resolutions of the board are carried into effect.” Some time in 1947 (date not given) the following is found in the minutes: “The president, Mr. John W. Thomas, made his annual report and presented financial statements which disclosed the condition of the company as at December 31, 1946. The total gross income for the year was $571,734.11, with total net barrels produced 330,952, selling for $488,862.00. Mr. Thomas also stated that the company is in excellent financial condition. We owe no money, have over $100,000.00 in the bank, and it shall be our aim to pay maximum dividends consistent with good business practice.” The record shows the Company was receiving a monthly income of $50,000 in August, 1947.

On June 1, 1947, President Thomas was receiving a salary from the Company of $825.00 per month, and L. F. Cox was receiving a salary of $700.00 per month. These salaries continued until the corporation was dissolved.

On August 29, 1947, the following resolution was passed:

“ * * * The minutes of the meeting held June 4, 1947 were read and approved.

“On motion duly seconded and by the affirmative vote of all the directors present, L. F. Cox was authorized to negotiate with L. W. McCrory, Trustee, regarding the purchase of 80 acres in Block 71, American Tribune New Colony Subdivision, Archer County, Texas, on the basis of $150.00 per acre cash and $250.00 per acre out of l/8th of the-oil.”

This resolution is the basis for this lawsuit, because instead of the above resolution having been carried out by the president, he had the lease purchased in the name of and by the director Cox. This, in the writer’s opinion, could be no less than a constructive trust. It becomes immaterial, in the eyes of the law, why Thomas directed Cox to buy the lease personally so long as it was beneficial to the Company that the order of the Company be carried out. The jury found that all of the directors who voted to pass the resolution knew at the time they voted for it that the lease would have been beneficial to the Company and knew at the time Thomas talked to them privately and persuaded them not to go through with the lease that it would have been beneficial to the Company to have bought the lease. Thomas testified to that effect and so did Cox.

The only reason given why the Company did not purchase this lease is that Thomas had made commitments to prospective purchasers, back in May, that he would leave the property in status quo, and that he did not wish therefore to materially change the status of the corporate assets. No resolution had been passed concerning such reason advanced by Thomas and there had been no stockholders’ meeting wherein Thomas had been ordered to sell the Company, as provided under sections 3 and 4 of Article 1387, Vernon’s Anno.Civ.St, wherein it is necessary that four-fifths of the stockholders shall consent in writing before dissolution may be had, and section 4, “When, without a stockholders’ meeting, all the stockholders of the corporation consent in writing to a dissolution, the same shall be certified to as above and filed with the Secretary of State. * * * ”

Granting that Thomas was sincere in allowing Cox to purchase the lease personally and not allowing the Company to purchase the same, to its damage in the sum of $750,000, the reason given is not sufficient in law to keep a constructive trust from becoming. impressed upon the property. Thomas and Cox, not having been instructed by the stockholders 'to perfect a sale of the Company and not having been instructed by all the stockholders, and neither by the directors, that they shall refrain from engaging further in the oil business until they found a purchaser for the Company, and charged with the law that their participation in a known breach of trust involved responsibility on the theory of a constructive trust, 42 Tex.Jur., sec. 51, p. 656, could not be innocent purchasers. Neither are Thomas’ children innocent purchasers because our Supreme Court as early as 1887 in the case of Martin et al. v. Robinson et al., 67 Tex. 368, 3 S.W. 550, at page 557, said: “The remedy which equity gives, as has been well said, ‘reaches all those who were actually concerned in the fraud, all who directly and knowingly participated in its fruits, and all those who derive title from them voluntarily or with notice.’ A court of equity will wrest property fraudulently acquired, not only from the perpetrator of the fraud, but, to use Lord Cottenham’s language, from his children and his children’s children; or, as elsewhere said, from any persons among whom he may have parceled out the fruits of his fraud.” Wellington Oil Co. of Delaware v. Maffi, 136 Tex. 201, 150 S.W. 2d 60.

There is no doubt from the record but that the company would have acquired this lease if it had not been for the adverse action of Tilomas and Cox, and the law looks to the act and not to why they say they did it, in order to impress a constructive trust. 42 Tex.Jur., sec. 52, p. 658. Also, “so viewing the transaction, a court of equity is enabled to frustrate fraud and work complete justice, and this is its purpose in raising a trust by construction. As the Supreme Court has pithily said, ‘equity turns the fraudulent procurer of the legal title into a trustee, to get at him’ * * * ” 42 Tex.Jur.,, sec. 45, pp. 649-650. Appellants in this case did not have to allege fraud; the law imputes “legal fraud” by impressing the trust.

“The officers of a corporation are both agents and trustees; that is to say, they are agents of the corporation and trustees for the stockholders. Like the agent of an individual principal, officers of a corporation are at least trustees of its property. Both as agents and trustees they are liable for any breach of duty, the principles governing their liability being those of the law of trusts.” 11 Tex.Jur., sec. 372, p. 21.

“It is a cardinal principle that an officer of a corporation will not be permitted to malee a profit out of his official position, but must give to the corporation the benefit of any advantage, which he has thereby obtained. * * * The rule is that, in addition’ to being' authorized by disinterested direct,ors, a transaction between an officer and a cprporation will not be allowed to stand unless it be fair and reasonable to* the .corporation and its stockholders.” 11 Tex.Jur., sec. 373, pp. 23-24.

The trial court submitted this case to the jury evidently upon the theory of agency, and, as- I view the majority, opinion, it upholds contention of the trial court that Cox was merely an agent for the Company, to-wit, a broker who was trying to sell the lease to. it, and when he was told by the president of the Company it would not buy the lease'he would be justified in purchasing it.himself, but such is not the fact in this case.

In conformity with the principle that officers of a corporation are trustees of its property,- when an officer purchases a piece' of property anticipated to be purchased by the Company, the courts will impress a trust upon the property where the bargain made is unfair to the Company; but. let rs review the facts, pertaining to Thomas in diverting this sale on account of the fact that -it was made the same year he had agreed not to change the status-of the' corporation.' He told Cox on the 2nd pf September, 1947, not to buy this lease for the reasons given, and we find on September. 4, two. days later, he 'disposed o'f a Clay County lease for the sum of $1,045.00. We find on June 4, a few days after the month of May when he made this commitment to the prospective purchasers, that he allowed the Company to drill a well, which was not an offset, at an expense of between $18,000 and $20,000 to the Company; that he bought a lease for the sum of $3,812.50 and bought another lease which cost the Company three-eighths of $15,000 during the interim.

It was pretty well known by September 2 that Eddleman was the best prospective purchaser, for Cox met him on the street and suggested that he was going to submit a lease to the Company for purchase. Eddleman was in Wichita Falls when Thomas and Cox decided that Cox should buy the lease, and if they were afraid it might frustrate the sale, it would have been easy to have called Eddleman to see if it would frustrate the sale. However, if Eddleman and all other prospective purchasers would have told Thomas, Cox and all other directors that they would not buy their stock if this lease was bought by the Company, Cox would still hold the lease in trust for the Company because it was to the advantage of the Company that this lease be purchased. If a constructive trust will not be impressed on such a transaction, then all corporations in the State of Texas will be run at the mercy of the directors in diverting proposed purchases to themselves individually. Cox and Thomas were each charged with notice of the law that the act of diverting this lease to them was ■on an illegal and unfounded basis.

I keep connecting Thomas with Cox because the record shows that Thomas’ wife and children were substantial stockholders in the Cox Drilling Company, of which Cox is president and manager, and the record further reflects that Thomas’ children own one-half interest in this lease. Now let us see how that came about. On the date Thomas returned from his vacation, to-wit, September 2, Thomas told Cox he could not buy the lease for the reason given, but asked Cox to buy the lease, wherein Cox agreed to buy it by using Thomas’ money. Later Thomas told director Coffey to take his (Thomas’) check for $12,000 to the lessor, Luke McCrory, and to tell him it would be all right to cash it but that he, Thomas, did not know to whom the lease was to be made and would give him that information later. Coffey did deliver the message and the check to lessor McCrory. The fact that Thomas did not know to whom the lease was to be made out might indicate that it would be placed in some one’s name in trust to hold for the Company in case the sales did not go through, because he already had an agreement with Cox that Cox was to do the purchasing. Now after Thomas had invested $12,000 in the project and about the time it was definitely determined that Eddleman was contracting to purchase the stock, to-wit, sometime in October, here is the way Thomas’ children came into the picture. Cox tells Thomas that he is discouraged in the lease, he doubts if it will produce. Upon such information, however, Thomas decides to allow his children to buy a hálf interest in it. Thomas at this time and at the time of trial still held Cox’s note without any payment having been made upon it. Now instead of Thomas giving Cox credit for $6,000 on his note for a half interest in the project, he allows his children to each give Cox a check for $3,000 for one-half interest in the property. This makes a total of $18,000 which Thomas and his family have advanced to the proj ect.

Now on November 20, 1947, there was a “special meeting of the Board of Directors of the Deep Oil Development Company” held.in the office of the company at 3:30 P. M. This was a meeting where some of the witnesses say that the resolution of August 29, supra, was read and that Eddle-man and Les Humphreys both were present when it was read. The reading of this resolution does not impute to them that this same lease so described had been diverted into the name of Cox and the children of Thomas. It does not in any way connect up with the lease which Cox later began to drill and the one in which the description was read. It is noted that the Wilson land cov'ers considerable acreage; the resolution • covers about one minute’s reading time. There is nothing in the minutes, as there was in previous minutes, substantially as follows: “The minutes of the méeting 'held on - were read and approved.” This special meeting of the board was called, however, for the purpose of selling stock to Eddleman. All of the minutes pertained to the sale of stock, the reorganization of the company, selecting new directors, etc.

The minutes of the company indicate that the meeting on November 25 was directed to the same purposes. There is nothing in the minutes nor in the testimony that indicates any discussion was made about this lease or any other piece of property belonging to the company at the meetings held on November 20 and November '25.

On November 30 another meeting was held by the new board which confirmed what had been done at the previous two meetings. These three meetings placed Ed-dleman and his new directors in charge of the assets of the Company. We can readily see that they were busy acquainting themselves with such wide and varied businesses the Company had, to-wit, over thirty producing oil leases scattered over several counties producing 800 barrels daily and over thirty non-producing oil leases scattered over several counties. So in the midst of all this turmoil, while Eddleman and his associates were busy acquainting themselves with the affairs of the Company, Cox and Thomas move out on this lease on December 3, the last meeting having been held on November 30. They start drilling on December 7 and in thirteen days they have them an oil well. The jury found, the court rendered judgment upon their findings and the majority opinion of this court has approved such findings and such judgment, that because Eddle-man was present when the resolution dated August 29, 1947 was read on November 20, 1947, that Eddleman with such knowledge failed to notify the defendants of any claims the plaintiffs might have within a reasonable time under all the facts known to him at that time, and that E. H. Eddle-man and his agents had sufficient knowledge of the facts which would have put an ordinarily prudent person on inquiry, which, if - pursued, with reasonable diligence, would have disclosed at the time he bought the stock of the Company that the old directors had passed the resolution of August 29, 1947.

As I see it' by a reading of the minutes of August 29, 1947, which merely ordered the directors to buy a lease by legal description, it would not impute anything to a person who was listening except that it might bring to his mind that a lease had been ordered purchased and that officers of the Company- may have carried out such orders of the directors, as, according, to law, they should do, and/or they did all they could do-to carry them out. In other words, it would impute to, an unbiased person, who had no occasion to suspicion any adverse action from any of the directors, that if the lease had not been purchased and the lease was not in the process of being -purchased by legal examination of the title, etc., that it would be only another lease which they attempted to buy, but there is nothing in the reading of these minutes which would bring to the mind of anyone that that particular lease which was ordered purchased by the Company had been illegally diverted to and had been bought by two of its directors; and that it was to the best interest of the Company that it purchase the lease.

The law does not place the burden upon Eddleman to immediately trace down the title to this lease or any other piece of property which he was buying or had the right to buy from the Company, he not having been put on notice that a wrong had been perpetrated against the Company. He had a right under the law to assume that everything had been done that could be done to purchase this lease. The law, however, places the burden upon Cox and Thomas, who had illegally diverted the purchase of this property from the Company and into their hands, to give full disclosure to the stockholders of their acts. They both testified they were present' and heard the minutes read pertaining to the resolution of August 29 'but neither said a word, and under the law it was their duty to explain to all who were there, as well as to all stockholders, that instead of the Company purchasing this lease that they themselves had purchased the same in the name of Cox with the use of Thomas’ money, that i-t was advantageous at the time that they did so for the Company to have purchased the same, that it was still advantageous to the Company that it purchase the same, that the reason why the Company ■had not purchased the same was because some of the directors wanted to sell their stock and thought it might frustrate the sale, and since there were some of the directors who were not present at the time the order was given and were not a party to the refusal of the company to purchase the lease, and since the purchaser of said stock was present, that if they then desired to look into the matter and see if they wanted this lease they would have the privilege to do so but if they did not want the lease then Cox and Thomas did want it as they were expecting to start a well within a few days. Now if Cox and Thomas had fully disclosed the above facts to not only the old directors and the new directors of-the Company but -to all of the stockholders of the Company, then in that event if the directors and stockholders of the Company allowed him within a reasonable time to expend the money for drilling a well, then in that event they may have waived their right to the lease. But no such “full disclosure of the facts” was ever revealed to Eddleman or to any other stockholder, except Cox, Thomas and Coffey. The record shows the stockholders lived in eleven different states, twenty different counties in the State of Texas and two foreign countries, to-wit, Canada and Cuba. It is the contention of the writer, under the facts in -this case, that a director of a corporation cannot legally purchase a piece of property for himself which the corporation has ordered to be purchased unless it be done under the following three conditions:

First, if the corporation were not financially able -to purchase the lease at the time. Green v. Hall, Tex.Com.App., 228 S.W. 183.

Second, if the deal were as beneficial to the corporation as it was to Cox for Cox to purchase instead of the corporation. Tenison v. Patton, 95 Tex. 284, 67 S.W. 92.

Third, if Cox had fully disclosed all the facts to all of the stockholders and they had acquiesced therein. Zorn v. Brooks, 125 Tex. 614, 83 S.W.2d 949.

The facts may show that Eddleman knew that Cox had bought the lease which Cox had talked to him about submitting to the Company, but there is no evidence imputing to Eddleman that the directors had ordered this same lease to be purchased for the Company and that Cox and Thomas had diverted the lease to them instead. This is the missing link that appellees “failed to give full disclosure of the facts to Eddleman.” However, if Eddleman and all of the other directors had known the full facts in the case but did nothing about it for the benefit of the stockholders in order that they might carry out their sale and purchase of stock, still Cox would have purchased this lease in trust for the stockholders because it is not the law in this state that a pro•spective purchaser and the directors of a company can cause the company to lose $750,000 because a purchaser wants to buy some of the stock owned by some of the directors who want to sell. Appellees argue they had a right to go out of the oil business and.to sell their stock. No one questions such á right; but while doing so they cannot, while a director, injure the corporation materially and reap the benefit of such injury. See Tobin Canning Co. v. Fraser, 81 Tex. 407, 17 S.W. 25; Zorn v. Brooks, supra; Scott v. Farmers’ & Merchants’ Nat. Bank, 97 Tex. 31, 75 S.W. 7, 104 Am.St.Rep. 835; Canadian Country Club v. Johnson, Tex.Civ.App., 176 S.W. 835, error refused; Aransas Pass Harbor Co. v. Manning, 94 Tex. 558, 63 S.W. 627; Hildebrand Texas Corp., Vol. 3, sec. 700, p. 70; Moore v. Waco Building Association, 19 Tex.Civ.App. 68, 45 S.W. 974, error refused; Fletcher Cyclopedia Corporations, Vol. 2, sec. 760, pp. 791-793; Commercial & Agricultural Bank v. Jones, 18 Tex. 811; 19 C. J. S., Corporations, § 768, pages 126-127; Edwards V. Strong, Tex.Civ.App., 207 S.W.2d 655, reformed and affirmed Tex.Sup., 213 S.W.2d 979.

So, the diversion of a lease from the corporation to one or more of the directors is invalid when such action is contrary to the interest of the corporation. It has already been discussed that appellees could not have been innocent purchasers of this lease under the facts. Their defense in order to be released from the constructive trust is by and through the actions of Thomas in persuading some of the directors individually (and not at a directors’ meeting) to say that they would rescind the res-ohttion of August 29, 1947. Of course such personal action of a director would not bind the company and would be of no force and effect under the law. Appellees cite the correct law pertaining to a directors’ meeting and its importance in Hildebrand on Texas Corporations, Vol. 2, p. 575, secs.. 637-638, wherein it is stated, among other things as follows: “The power invested in the Directors to control the management of the corporation is not a joint and severa], but joint only. Therefore, when the Directors purport to act for the corporation, they must be assembled as a Board. They, cannot act and give their consent separately and bind the corporation. Not only must the Directors act together as a body, but as a general rule, they must be assembled at a. formal and legal meeting and not at a casual or informal meeting. The reason for this requirement is that each Director should have an opportunity to discuss fully all matters that come before the Board. Very often a strong Director by a full and frank discussion of the pending question may be able to convince some of the other Directors that their conclusions formed-be-' fore the meeting are erroneous.” But even if their actions could be construed as a legal directors’ meeting while saying that they would rescind such resolution, such action would be of no force and effect for at the same time they all admit that it would have been beneficial to the Company to purchase the lease and that they (except Coffey) did not know that Thomas was assisting Cox in buying the lease. But I find there were not four disinterested directors who agreed to rescind the resolution of August 29. In the first place Thomas was an interested party and his vote would be of no avail. In fact all of them were interested parties in view of the fact that their action was a selfish interest, to-wit, to sell their stock. We have now disposed of Thomas; now we shall take the others.

Director W. H. Taylor was not present on August 29 and was not consulted later by Thomas to rescind.

Director Les Humphreys was found by the jury to not have given his consent to rescind said resolution.

Director Cox was recipient of the result of said rescission and of course his consent would not count.

Director John Loggie told Thomas he would rescind upon the following conditions found by the jury, to-wit: that if the sale of the stock did not go through that Cox would let the Company have the lease or part of it back. Such attempted rescission being based upon a condition his consent would not count.

Director Gutzman consented to rescind the lease individually and not in a directors’ meeting but he did not know at such time that Cox was to purchase the lease nor that Thomas was paying for the lease.

Director John C. Coffey was the only one of the directors who knew all the facts and he agreed individually to rescind the resolution.

So it is readily seen from the facts in the case that there was no legal rescission and even if there were, it would not keep the constructive trust from being impressed.

The only testimony I can find in the record that directly called Eddleman’s attention to the fact that the lease which Cox owned was the same lease which the Company ordered Cox to buy happened about the middle of December, according to Coffey, wherein Coffey testified in said conversation that Eddleman suggested they not say anything about it until they were satisfied by an investigation because he did not want to cast any reflections unless it was proved they were justified. The testimony further shows that immediately thereafter an investigator was employed to ascertain the facts. This, in the writer’s opinion, does not show acquiescence but it merely shows good judgment on the part of Eddle-man because no business man desires to cloud the title to land where there is a drilling oil well unless he knows where he stands. The middle of December would be about the 15th; the well was completed on the 20th.

The evidence is insufficient to connect the new director Gay with the facts in the case that Cox had purchased the lease which he had been ordered to purchase for the Company, because he did not come to Wichita Falls until the 25th of November, 1947.

The new director Ford was not sufficiently notified of all the facts in the case when he became a director on November 25, 1947. He had never lived in the area before and was not familiar with the properties of the Deep Oil Company. Even though he was out on this lease a time or two while the well was being drilled by Cox, yet he had not been informed by Cox that the lease which he was drilling was the one which the Company had ordered him to buy for the Company. Ford was watching the developments of the Cox well because the Company had an adjoining lease. However, if they had known the facts, laches would not attach as to all other stockholders until the other stockholders had been notified of all the facts and had failed to act in their own behalf.

Another peculiar thing about this lease is that Cox did not file the same for record until long after he had brought the well in, same being filed January 19, 1948. Neither did the Thomas children file their assignment until the same date.

I do not believe under the following authorities and other cases which I have read that laches or estoppel prevents appellants from recovering this lease, to-wit: Culver v. Pickens, 142 Tex. 87, 176 S.W.2d 167; Humble Oil & Refining Co. v. Trapp, Tex.Civ.App., 194 S.W.2d 781, error refused; Richey v. Miller, 142 Tex. 274, 177 S.W.2d 255, 170 A.L.R. 832; Burleson v. Burleson, 28 Tex. 383; Wright v. Bonta, 19 Tex. 385; McLaren v. Jones, 89 Tex. 131, 33 S.W. 849; Williams v. Texas Employers Ins. Association, Tex.Civ.App., 135 S.W.2d 262, error refused; Railroad Commission v. Shell Oil Co., Tex.Civ.App, 170 S.W.2d 568; Krohn v. Williamson, C.C., 62 F. 869.

There could be no effective acquiescence or ratification of this lease by the appellants unless they had knowledge of the material fact's. There is testimony from at least one stockholder who was not ail officer or director of the Company to the effect that he did not know of such facts, and it is not contended by appellees that all of the stockholders knew the facts. Great Atlantic & Pacific Tea Co. v. Athens Lodge, Tex.Civ.App., 207 S.W.2d 217, error refused, N. R. E.; City of Laredo v. Macdonnell, 52 Tex. 511; Harris Millinery Co. v. Bryan, 59 Tex.Civ.App. 477, 125 S.W. 999; Reese v. Medlock, 27 Tex. 120, 84 Am.Dec. 611; Devoe & Raynolds Co., Inc., v. John P. Steger Lumber Co., Tex.Civ.App., 9 S.W. 2d 277; Allison v. Harrison, 137 Tex. 582, 156 S.W.2d 137; Zorn v. Brooks, supra.

I disagree with the majority opinion which holds that the corporation did not have a prior right to this lease. The facts show that on August 21 the Company had some $227,000 in the bank and on August 29 the directors ordered Cox to buy this lease. That Cox in turn informed the landowner that they would accept the lease at the stipulated price per acre of $150 in cash and $250 in oil, which the landowner agreed to accept. I disagree with the holding wherein it states, to-wit: “To have acquired title or an interest under the law, the corporation would have to have followed the action of its directors by paying the purchase price and obtaining a conveyance, or entering into a valid contract to convey with the owner of the lease.” My contention is that the corporation did acquire title to this lease by the action of Cox in purchasing it, that even though he did not intend to purchase it for the Company, yet the law says -that he did by impressing a constructive trust thereon. It is not a matter of taking this lease away from Cox because the law does not take away from those who do not own. Neither is it a question of appellants’ standing by and waiting to see if the oil lease would produce as though it was a wildcat lease. The record shows that the lease was an offset to a producing well which had 75 feet of rich sand in the lower strata and 25 feet of rich sand in the upper strata. In other words, it was practically the same as a proven lease when appellees started drilling their first well. My thorough conviction is that there was no ratification on the part of any of the appellants of Cox’s action in purchasing this lease for himself; neither are there any legal grounds for estoppel or laches which would prevent them from recovering the same.

The discussions appearing in this dissent are raised by appellants’ points of error. There are many errors that are sufficient to remand this case but I will not point them out ¡n this dissent, since I am of the thorough conviction that the same should reversed and rendered with instructions to the lower court for appellants to pay appellees the purchase price of the lease, ^or ab sums °f money they have reason-abl7 expended while drilling and equip-wells thereon and operating the ^ease> ^ess the Pldce of the °il runs which have been recovered by appellees from said ^ease’ there seems to be a stipulation in ’record Pertaining to this matter and h be easy f°r the court to ascertain the true facts from bank records, pipe line runs, etc.

For the reasons above stated, this dissent is entered,