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December 31, 1959


The opinion of the court was delivered by: John E. Miller, Chief Judge.

  This is an action brought by the plaintiff under the Securities Act of 1933, as amended. The section upon which the plaintiff particularly relies is 12(2), 15 U.S.C.A. § 77l(2). The action is based upon alleged misrepresentations made by defendants which induced plaintiff's predecessors to purchase certain interests in oil leases and oil field equipment as set forth in an assignment executed by defendants on November 29, 1956. The defendants denied they made any misrepresentations and filed a counter-claim for damages in which they alleged that the plaintiff failed to pay in full the note executed by it as consideration for the assignment.

The intervenors seek to recover the sum of $6,000 allegedly due them by virtue of an assignment from the defendants, and alleged in their intervention that the obligation was assumed by the plaintiff. The plaintiff in turn filed a counterclaim against the intervenors, in which it alleged that the intervenors were parties to the defendants' misrepresentations.

The case was tried to the court on November 10-12, 1959, and at the conclusion of the trial the case was submitted and briefs were requested from each side. The briefs have been received and considered by the court together with the pleadings, all the testimony, exhibits and entire record. Findings of fact and conclusions of law are included in this opinion, which is filed in accordance with the provisions of Rule 52(a), F.R.Civ.P. 28 U.S.C.A.

The plaintiff, Ouachita Industries, Inc., is an Arkansas corporation, organized in 1959, and is the successor to Keith Mining Trust. By virtue of an indenture, dated March 2, 1956, Creswell-Keith, Inc., was the Trustee for Creswell-Keith Mining Trust. Creswell-Keith, Inc., was also a major shareholder in the Trust. The Trust was originally created to develop and operate uranium mines in Nevada and gold mines in Mexico. The founders of the enterprise were Arch Creswell and R. Neville Keith. Creswell, an engineer, was not directly involved in the oil assignment, and apparently was working in Mexico during the period in question. Keith was the promoter and in charge of the sale of stock in the plaintiff's predecessors. He was the principal representative of plaintiff's predecessors in the purchase of the interests in the leases and the oil field equipment.

The defendants, W.S. Bradham and B.F. Willingham, were partners in the Oil Well Service Company, a partnership, organized in June 1955. The partnership purchased, developed, and serviced oil leases in the south Arkansas fields. Defendant Willingham was and is an automobile dealer at Gurdon, Arkansas. The defendant Bradham is a long-time oil man from El Dorado, Arkansas.

The intervenors, J.E. and Mary McMillan, are husband and wife and operate a mercantile store at Gurdon, Arkansas. Mr. McMillan loaned money to the defendants on various occasions, and at the time of the assignment to the plaintiff, he was the holder of a mortgage on all of the partnership assets as security for a $40,000 loan. The intervenors are now claiming against the defendants and the plaintiff by virtue of an assignment of January 13, 1956, executed by the defendants and allegedly assumed by the plaintiff.

Originally the plaintiff seemed to contend that between September 6 and November 29, 1956, the parties had a continuing series of interlocking transactions by which Creswell-Keith, Inc., acquired from the defendants Willingham and Bradham certain undivided mineral interests purchased because of oral misrepresentations by defendants, and that in these transactions the defendants made use of the mails in that:

    "A. Defendants and plaintiffs entered into an
  escrow agreement * * *. The escrow agent obtained
  money by draft through the United States mails.
    "B. Defendant signed and mailed * * * a
  division order * * (and) caused the Stanolind Oil
  Purchasing Company to mail its check to

The plaintiff further alleged that "there were other uses of the United States mails * * * not specifically stated here."

On February 28, 1958, the plaintiff filed an amendment to its complaint in which it alleged that as a part of the consideration for the assignment (meaning the assignment dated November 29, 1956) plaintiff was required to send more than 120 payments by means of the United States mails.

In addition to the wells which they drilled, they also serviced wells for other people. They charged for their services the customary price, whether it was servicing wells in which they had an interest or wells of third parties.

At the trial of the case the evidence clearly established that there was no continuing series of interlocking transactions, but rather there were three separate and distinct transactions between Creswell-Keith, Inc., and the defendants, but as hereinafter shown the liability, if any, of the defendants to the plaintiff arises from the assignment of November 29, 1956.

In order to properly understand and evaluate the assignment of November 29, 1956, which is the basis of this lawsuit, it is necessary to first examine the actions and events that preceded the execution of the assignment.

On November 21, 1955, Marvin and Virginia Harr assigned a 7/8th working interest in certain oil and gas leases held by them to the defendants. The assignment was recorded on December 3, 1955.

On January 13, 1956, J.E. McMillan loaned $6,000 to the defendants. To secure the payment of the loan, the defendants assigned to McMillan a 1/16th interest in certain oil and gas leases and guaranteed McMillan a 1/16th interest in no less than three producing oil wells with the option that if the interest conveyed in the oil wells did not pay McMillan $6,000 in oil royalties plus 6 percent interest within three years, he could elect to have the defendants pay him the sum of $6,000 plus 6 percent interest, less the amount he had received in oil royalties, and McMillan agreed to assign back to the defendants the interest they had assigned to him. This assignment was recorded on January 17, 1956.

On May 14, 1956, J.E. McMillan made another loan of $40,000 to the defendants and took a mortgage on all of the partnership assets. For interest on this loan the defendants assigned to McMillan a 1/16th interest in certain oil and gas leases and guaranteed him a 1/16th interest in at least six producing wells. This assignment was recorded on May 17, 1956.

On July 3, 1956, Neville Keith and another director, Dr. Kenneth Stuart, representing the plaintiff, called on defendant Willingham at his place of business in Gurdon, Arkansas. The purpose of this visit was to attempt to sell Willingham stock in the Creswell-Keith Mining Trust. Keith told Willingham of the operations of the Trust, including the Nevada uranium mines and the Mexico gold mines. Willingham declined to purchase any stock, and in the conference told Keith and Stuart of his own oil interests, more in an effort to explain his lack of interest in a project to develop uranium and gold mines than to sell the assets and business of the partnership. However, Keith and Stuart became interested in the oil business, apparently thinking that the opportunities in the oil business were better than those in the mining operations.

Following the conversation of July 3, 1956, there were negotiations in August between the plaintiff, represented by Keith, and the defendants for the purchase of the remaining 1/8th working interest in the so-called "Harr" oil and gas lease. As a result of such negotiations the plaintiff and defendants on September 6, 1956, entered into an escrow agreement at the First National Bank of Gurdon, Arkansas, for the purchase by the defendants of the 1/8th working interest in the "Harr" lease.

Creswell-Keith, Inc., deposited with the bank cashier's checks payable to it for the purpose of obtaining cash with which Creswell-Keith, Inc., could comply with the escrow agreement. The checks were sent through regular banking channels by the bank for the benefit of Creswell-Keith, Inc., and when they were collected, this cash was made available to Creswell-Keith at Gurdon to consummate the transaction.

On September 11, 1956, Marvin and Virginia Harr assigned to the defendants their remaining 1/8th working interest in the oil and gas leases held by them. On the same day the defendants assigned this 1/8th interest to the plaintiff, thereby completing the escrow agreement. The purchase price paid by the plaintiff was $7,000, and consisted of two checks, both of which were sent through the United States mail for collection.

At the trial the plaintiff made no claim that this particular transaction had anything to do with the fraud. All of the testimony on the point was introduced by the defendants. The affidavit from Stanolind Oil Purchasing Company shows on its face that its check was not for one month's runs as plaintiff originally alleged.

On October 12, 1956, the defendants assigned to the plaintiff their interest in the so-called "Pickard" oil and gas leases, reserving for themselves a 1/8th overriding royalty interest.

On October 13, 1956, defendants assigned to the plaintiff an overriding 1/8th interest in certain oil and gas leases referred to as the "Bacon" leases.

The assignment of the Pickard and Bacon leases on October 12 and 13, 1956, was subject to an overriding royalty retained by the sellers, and the consideration of $4,000 was paid for it. There is no allegation that there was any use of the mails or fraudulent representations in either of these transactions, and in fact they are not mentioned in the plaintiff's pleadings.

Following the acquisition of the oil interest in the above leases, the desires of Keith and the other Directors of plaintiff's predecessors increased greatly, and during the months of October and November 1956 Keith and various Directors visited and inspected the south Arkansas oil fields and the office and various leases operated by the defendants.

During this investigation of the oil business in general and in particular of the office and records of the defendants in El Dorado, Arkansas, and the leases then being operated by the defendants and which they were undertaking to develop, Keith and his associates opened negotiations with the defendants for the purchase of all the defendants' oil leases and equipment thereon together with the drilling rig and its equipment. The defendants had lost money in their oil operations since its inception. The plaintiff Keith and his associates were fully advised, not only by the defendants personally but by their examination of the office records. They went personally to each and every lease, and by such investigation learned of the exact status of every operation being conducted by defendants. They knew that the defendants were burdened with numerous debts arising from the oil operations. The major obstacles to the purchase of the interest of the defendants were (1) the plaintiff's lack of cash, and (2) the plaintiff's lack of an experienced oil man to supervise the oil operations. However, in early November 1956 Keith and his associates overcame the second obstacle by obtaining an agreement from the defendant Bradham to accept 200,000 shares of the capital stock of Creswell-Keith Mining Trust in return for his interest in the partnership assets, and he also agreed to manage the oil business for the plaintiff. The defendant Willingham agreed to accept for his interest in the partnership assets "an undivided one-fourth (1/4) interest in and to the aggregate interest presently owned by the said B.F. Willingham and W.S. Bradham in and to the oil and gas leasehold estates in and under said lands as to the formations and strata thereunder down to the depth of 3,300 feet below the surface of the ground, together with an undivided one-fourth (1/4) interest in and to the interest now owned by the said W.S. Bradham and B.F. Willingham in and to all personal property, machinery and equipment now upon said leases and used in connection with the operation thereof."

On November 21, 1956, the plaintiff, represented by Keith, and the defendants met at the office of attorney Duncan McRae at Prescott, Arkansas, and outlined the provisions of their agreement to him. McRae is an able and respected lawyer, and he was instructed by all the parties to draw up the necessary papers to conclude the transaction.

On November 24, 1956, a special stockholders meeting was held at the plaintiff's office in Hot Springs, Arkansas. The meeting was conducted by Keith, and he informed the stockholders that the Board of Directors had agreed to purchase the fractional interest in the leases and equipment thereon together with the drilling rig, etc., owned by the defendants. Defendant Bradham, at the request of Keith and his associates, was present at this meeting. The terms of the agreement were outlined to the stockholders by Keith.

On November 27, 1956, the defendants assigned to J.E. McMillan a 3/16th interest in certain oil and gas leases. This assignment was in accordance with the May 14, 1956, assignment, hereinbefore mentioned, in which the defendants guaranteed McMillan a 1/16th interest in at least six producing oil wells. This assignment was recorded November 30, 1956.

On November 29, 1956, the assignment in question here was executed. Under its terms the plaintiff was to receive all of the interest in the oil and gas leases, oil field equipment, etc., and accounts receivable owned by the defendants subject to the mortgage of J.E. McMillan, and subject to a reservation by defendant Willingham of a 1/4th interest in all the oil and gas leases assigned, including equipment on the leases. The consideration for the assignment was the assuming by the plaintiffs of the accounts payable owed by the defendants in the amount of $55,173.36, the assumption of the $30,000 balance of the $40,000 note to J.E. McMillan, the issuance and delivery to defendant Bradham of 200,000 shares of the capital stock of Creswell-Keith Mining Trust stock. In lieu of stock or other remuneration the defendant Willingham was to receive from the operation of the property a portion of the profits, etc., in accordance with the reservations set forth in the assignment.

Following the assignment plaintiff paid the $30,000 balance on the note to McMillan, and also paid over $55,000 of the accounts payable. The United States mail was used in sending checks for a portion of these payments. Between December 1956 and August 1957 plaintiff received through the United States mails $8,726.19 in oil runs. An additional gross amount of $8,383.22 was received from oil well servicing from December 1956 to December 1957.

During the first six months of 1957 the plaintiff drilled several wells on the leases acquired in the November 29, 1956, assignment. None of the wells were commercial producers and they were abandoned. This made Keith and his associates somewhat dissatisfied with the entire transaction.

In October 1957 plaintiff traded a portion of the oil field equipment received in the November 29, 1956, assignment to the defendant Bradham in return for his 200,000 shares of stock. The equipment traded included the portable drilling rig, and the "book value" of the property traded was in excess of $40,000.

The "oral misrepresentations" relied on by plaintiff were particularly set out in the plaintiff's answer to defendants' interrogatory No. 1, as follows:

"Answer to Interrogatory No. 1

    "The other oral misrepresentations include
  representations that:
    "1. The oil runs from the wells in the
  Assignment total $3000 a month.
    "2. The monthly income from servicing other
  wells is $3150.

"3. The defendants serviced 25 to 30 wells.

    "4. The equipment and personal property of
  defendants was ...

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