Elkins v. Industrial Gas Corp. , 182 Va. 84 ( 1943 )

Campbell, C. J.,

delivered the opinion of the court.

Appellant, Davis Elkins, filed his original bill of complaint against Bristol Natural Gas Corporation and Industrial Gas Corporation, Virginia corporations with their principal offices in Bristol, Virginia. Subsequently, he filed an amended bill and' the East Tennessee Light and Power Company was made a party defendant. This latter defendant is .not primarily interested in the questions involved in this litigation. The parties will hereafter be referred to as Elkins, Bristol and Industrial,

The record sets forth these facts: Elkins, in the year 1937, was the owner of certain oil and gas leases, leasehold estates, rights, gas wells, drilling equipment and other personal property located in the counties of Scott and Washington, in the State of Virginia. While the owner thereof, Elkins, on the 10th day of April, 1937, executed a deed of trust to Grover F. Hedges and Arthur B. Hodges, trustees, for the purpose of securing John C. Adams and Company in the gross sum of $12,000 evidenced by two notes for money advanced to Elkins which was used in drilling for gas. On November 24, 1941, Donald T. Stant was substituted as trustee in the place and stead of Hedges and Hodges, trustees.

Subsequent to the execution of the deed of trust, Elkins secured a charter for the Bristol Natural Gas Corporation, to which he assigned the various properties heretofore referred to, for a consideration of five hundred shares of its capital stock. This assignment was subject to the John C. Adams Company debt. By proper corporate action, Bristol accepted the conveyance, subject to the stipulations and conditions mentioned therein.

On November 29, 1937, Bristol and Industrial entered into an agreement by which Bristol sold and agreed to deliver to Industrial, a commercial dealer in gas, natural gas produced from the leases therein described until January 1, 1948, and as long thereafter as gas was produced in paying and marketable quantities, unless the agreement was sooner terminated. Thereafter, a supplemental agreement was entered into by Bristol and Industrial.

The supplemental agreement is primarily concerned with the drilling of additional wells. Under the first paragraph Bristol agrees to drill not exceeding four wells, one at a time, only after gas sales show an insufficient reserve as therein defined. The second paragraph modifies the first to the extent that if Bristol drills any two wells, successively or otherwise, which are abandoned because gas cannot be produced therefrom in paying quantities, Bristol shall not be required to drill any further wells. Under the third paragraph, if Bristol fails to drill as required by the first paragraph, or the event covered by the second paragraph occurs, Industrial has the right to drill wells until the four have been completed, to continue drilling others so long as necessary to maintain the reserve, and to charge Bristol the total cost of drilling and completing every well drilled by Industrial. Paragraph 4 makes the cost of any wells completed by Industrial under paragraph '3, as well as all other wells at any time drilled by it, additional advances and loans, and provides that all the terms of paragraph 5 of the principal agreement providing for repayment of the $12,000 advance shall apply to the cost of such wells, but makes the lien for such advances subject, first, to the $12,000 advance, and, second, subject to the debt secured by the Hedges and Hodges deed of trust.

Subsequent to the execution of this agreement, Industrial complained of a shortage of gas and called upon Bristol to dig an additional well. Bristol proceeded to do this, but in the meantime the situation as to the gas shortage became so acute that Industrial, in order to carry out its contract with the East Tennessee Light and Power Company, began to dig a well known as “Number 8.” This action was taken under the alleged right to do so, as provided in the supplemental agreement. During the progress of drilling well No. 8, Industrial withheld all payments for gas to Bristol and applied the sums due to the cost of digging No. 8. Thereupon, Bristol proceeded to cancel the contract under the provision of Clause 13 of the principal agreement.

On November 29, 1941, this suit was instituted. Its object is to obtain a declaratory judgment as to the. rights of the parties under the provision of the several contracts and deeds of trust.

Answers were filed by the respective defendants. The cause was then heard on April 1, 1942, upon evidence taken in open court and upon exhibits filed by agreement of the parties.

On June 5, 1942, the chancellor entered a decree in the nature of a declaratory judgment, by which it was adjudged that the indebtedness secured by the deed of trust from Davis Elkins to Hedges and Hodges, trustees, dated April 10, 1937, had been fully paid, so far as the rights of Industrial Gas Corporation were concerned, and the lien of said deed of trust discharged; that Industrial has a lien under the principal agreement and supplemental agreement between it and Bristol for the repayment of the cost of drilling and completing well No. 8, prior in order to the lien of the deed of trust from Bristol Gas Corporation to D. T. Stant, trustee, dated May 31, 1941; that the monthly payments for gas purchased by Industrial from Bristol, after paying over to the latter the “aggregate amount of lease rentals, taxes and operating labor and repairs” may be retained by Industrial and applied to the repayment of such cost, etc., as provided by paragraphs 5 and 4 of the principal and supplemental agreements; that Bristol recover of Industrial the principal sum of $2,764.50, this being the amount due for gas purchased by Industrial; that the principal agreement dated November 29,' 1937, and the supplemental agreement dated December 13, 1938, between Bristol and Industrial are subsisting and binding obligations between the parties; that the lien of the deed of trust from Bristol to Starit, trustee, is subordinate and subject to all rights and interests acquired by Industrial under the two said agreements; and that the injunction prayed for be denied.

Appellant Elkins relies upon the following assignments of error:

“First: The court erred in holding that Industrial has a lien tinder the two agreements for repayment of the costs of drilling well No. 8 prior to the May 31, 1941, deed of trust and in the holdings incidental thereto.

“Second: The court should have declared the contracts properly cancelled, and removed them as a cloud upon Bristol’s title.

“Third: The court erred in holding that the $12,000 Adams notes secured by the Hedges and Hodges deed of trust had been paid and the hen discharged, and in failing to hold that Elkins is the holder thereof and entitled to the benefit of the lien.”

To incorporate in this opinion the full text of the various agreements and the voluminous correspondence filed as exhibits in this case would serve no good purpose and only tend to confuse the issues.

A careful examination of the record clearly shows there is no merit in the first assignment of error.

The crux of the two agreements entered into by Bristol and Industrial is found in paragraphs three and four of the supplemental agreement and are as follows:

“If, for any reason, the Seller shall fail to commence or complete any well required to be drilled by it, pursuant to the provisions of paragraph First hereof, or if Seller shall have drilled any two wells, both of which shall have been abandoned upon completion, pursuant to the provisions of paragraph Second hereof, and shall not thereafter voluntarily continue the drilling of additional wells, then in either of such events, Buyer shall have the right, at its sole option, from time to time, to carry out the procedure set forth in paragraph First hereof, and if the four wells mentioned in paragraph First shall be completed as provided therein by either the Seller or Buyer, and a sufficient gas reserve, as therein defined, shall not thereby be developed and thereafter maintained; then the Buyer shall have the right at its sole option, from time to time, to drill additional wells to develop and maintain such gas reserve, and said Buyer shall thereupon have the right, which is hereby expressly granted by Seller, to charge to Seller the total cost of drilling, equipping, shooting and completing each and every well drilled by Buyer hereunder, and to recover such total cost together with interest thereon at the rate of six percent (6%) per annum, as provided in the next succeeding paragraph.”

Paragraph 4 reads:

“The total cost of drilling, equipping, shooting and completing each and every well which may be drilled by the Buyer under the provisions of paragraph Third hereof, as well as all other wells at any time drilled by the Buyer, shall be considered and treated as, and shall constitute additional advances in payment for gas to be delivered under the Principal Agreement, and additional loans thereunder by the Buyer to the Seller, and shall become and be subject to all of the provisions of paragraph 5 of the Principal Agreement to the same extent as if expressly set forth therein, so that all of the provisions of said paragraph 5 of the said Principal Agreement, providing for the repayment and the securing of the repayment of the Twelve Thousand ($12,000.00) Dollars mentioned therein shall apply with equal force and effect to the total cost of drilling, equipping, shooting and completing each and every well which may be so drilled by Buyer.”

The correspondence filed as exhibits, as well as the testimony of W. O. Clarkson, a witness for appellant, clearly shows that the production of gas by Bristol was at a minimum. Industrial was being urged by its purchaser, the Power Company, to comply in full with its contract to furnish it gas to meet.the needs of its customers. Repeated efforts were put forth by Industrial to prevail upon Bristol to dig additional wells, but without avail. It was under these conditions that Industrial proceeded to dig well No. 8.

The technical'defense urged by Bristol—that it was then engaged in digging well No. 7 and under the agreement it was required to dig one well at a time—should be given no recognition in a court of equity.

The plain meaning of the contract was that Bristol should furnish Industrial sufficient gas to meet its needs. This, Bristol was unable to do and thus Industrial was forced to dig well No. 8 in order to keep its contract with its customers.

There is no merit in the second assignment of error.

Since we are of opinion that at the time of the institution of this suit a bona fide dispute existed between Bristol and Industrial as to their rights under the said agreements in regard to the cost of drilling well No. 8, it would be inequitable to cancel said contracts at this time. The question of cancellation will arise should Industrial default in the payment of the sum finally adjudged to be due Bristol.

The third assignment of error is also without merit.

The evidence sustains the trial court’s conclusion that so far as Industrial is concerned, the indebtedness of $12,000 (evidenced by the two notes referred to herein as the Adams notes), secured by the deed of trust of April 10, 1937, to Hedges and Hodges, trustees, has been fully paid and discharged.

By the assignment of May 4, 1937, Elkins conveyed the property therein described, subject to the lien, of the above deed of trust, to Bristol, in exchange for 500 shares of its fully paid capital stock. Bristol agreed, under the terms of the assignment, to pay all land rentals and other charges and obligations arising out of the leases to Elkins; but it did not assume the payment of the $12,000 hen.

The resolution of the directors of Bristol authorizing an acceptance of the assignment, according to the recorded minutes of their meeting, recites that the consideration passing from Bristol, in addition to the stock, was its assumption of all obligations of Davis Elkins under the leases and “all other obligations of Davis Elkins of every kind and character which have been incurred by him in and about securing the said leases and drilling done and drilling about to be commenced,”, and “subject to notes aggregating twelve thousand dollars ($12,000), secured by deed of trust from Elkins to Grover F. Hedges and Arthur B. Hodges, trustees.”

In the principal agreement between Bristol and Industrial, no reference is made to that deed of trust. The supplemental agreement, however, refers to the deed of trust, but undertakes to subordinate it to advances of.money theretofore made by Industrial, while giving it priority over subsequent advances to be made by Industrial. The supplemental agreement provides for payment by Industrial to the Adams Company of the full purchase price of gas due by Industrial to Bristol until the Adams notes are paid, and to that end assigns the total purchase price for such gas to Adams Company.

Thus, we see that there was no assumption of the notes in the assignment of the property, none in the corporate action of Bristol accepting the assignment, and only a conditional and qualified assignment in the supplemental agreement of December 13, 1938, some months after the date of maturity of the notes.

No payments were made on these notes by reason of the supplemental agreement.

Elkins, as the sole stockholder of Bristol, authorized and affirmed its corporate action in effecting the assignment of May 4, 1937. He signed the two agreements between Bristol and Industrial as the president of the former.

By reason of the peculiar relationship of Elkins to Bristol, there was not in 1937, any benefit to be expected by him by an assumption of the notes by Bristol. The reference to the lien in the assignment was merely, at best, evidence that the corporation had notice of if. The reference in no wise affected its validity or priority as a lien. It disclosed that Bristol could not take an absolutely clear title to the property until the lien had been released, and if it desired that it be released it would have to make some provision for its payment or cancellation.

As we have seen, all of the capital stock of Bristol was owned at all times by Elkins. He completely controlled, dominated, and supervised its policies and operations. While Bristol held title to its property through the fiction of corporate entity, in substance and effect, all of its holdings belonged to Elkins through his total ownership of all of its capital stock.

On July 6, 1939, Elkins wrote to Adams Company as follows:

“You hold two notes of mine for $6,000 each, which notes please forward to the Dominion National Bank, Bristol, Virginia, who have been instructed to pay same, including interest due thereon. Please advise when the notes are sent to the Dominion National Bank.”

The Adams Company promptly had an Arkansas bank, to whom the notes had been pledged as security, forward them for payment. The principal of the notes, with interest in the sum of $145.59, was collected by the Dominion National Bank from Elkins on July 13, 1939, and sent to the Arkansas bank. After taking the notes, Elkins, by his counsel, sought until June 14, 1940, through considerable correspondence, to get the Adams Company to en-. dorse on them an assignment to him. When the Adams Company finally refused to do this, the treasurer of Bristol, at Elkins’ request, made the following endorsement on each of them:

“This note, having been assumed by the undersigned, and having bseen paid by Davis Elkins at the request of the undersigned, on account of its inability to do so, belongs to him as of July 13, 1939, the date of such payment.

Bristol Natural Gas Corporation by T. Frank Burk, Treasurer.”

This subsequent action did not alter the circumstances existing at the time of the payment of the note by Elkins.

Elkins was president of the corporation until March 26, 1-941, when he was succeeded by T. Frank Burk. Burk was also the treasurer of the corporation, and kept its books and records. He testified that prior to the payment of the Adams notes by Elkins they were carried on Bristol’s books as a liability in notes payable; but when Elkins paid them they were taken out of the notes payable account and credited as an open account due Elkins for an advancement to the corporation. He reaffirmed this procedure several times in his testimony, stating that the money advanced had never been repaid to Elkins.

.If, as the foregoing facts strongly tend to show, Elkins was, at all times prior to the payment of the notes, the primary obligor, then their payment by him satisfied and discharged the lien.

It is not necessary, however, to rely on this phase of the case for our conclusion. We agree with the trial court that-the documentary evidence in the case shows that, even though Elkins may have become the owner of the notes under circumstances entitling him to subrogation, Bristol had settled the amount due Elkins. The assignment from Elkins to Bristol and the corporate minutes of the corporation show that all the assets of the gas development, subject to the lien of the deed of trust of April 10, 1937, were conveyed by Elkins, in exchange for 500 shares of the capital stock of Bristol.

The ledger sheets of the corporation carrying the account between it and Elkins show that Bristol credited Elkins with $80,818 for the assets; but entered a charge against him for. the stock in the sum of $50,000 only. The corporation did not agree to pay $80,818 for the assets acquired. It exchanged its stock for these assets. Whatever the value of the assets, the stock was considered of equal value. One balanced the other. Bookkeeping figures could not properly increase the indebtedness of the corporation $30,818. The entries, value of the assets and value of the stock delivered in exchange therefor, should be exactly the same.

The record shows that Elkins advanced moneys to Bristol from time to time in furtherance of its activities, and that on several occasions Bristol repaid him, at least in part, for such advances. The account, starting off with a credit of $80,818 to Elkins and a debit of $50,000 against him showed a difference of $30,818, which should be deducted from the annual debit balance of Bristol. The amount of the Adams notes with interest, $12,145.59, was credited to Elkins by Bristol in its ledger account as of July 22, 1939. With these proper credits and charges, the last entry on the ledger sheets of the account between the two parties, as of February 28, 1941, shows Bristol with a small credit balance, as between it and Elkins.

Elkins having received credit for. the payment of the notes by him, the indebtedness evidenced thereby was, as between Elkins and Industrial, fully cancelled and extinguished. Whether or not Bristol, controlled by its sole stockholder, is willing to permit Elkins to make a further charge against it is a matter between it and Elkins. As between Elkins and Bristol, it makes no difference to either of them. Whatever affects Bristol affects Elkins. ' It is a matter of in which pocket he carries his assets.

The decree complained of is without error and is, therefore, affirmed.

Affirmed.