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 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
"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
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
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
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,
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
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
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
"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 ...