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January 5, 1966


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

In this action commenced July 27, 1965, plaintiff seeks to recover the sum of $20,171.24 and an assignment of a 1 percent overriding royalty interest because of an alleged fraud practiced upon it by the defendant. The plaintiff, Consolidated Oil & Gas, Inc., is a Colorado corporation with its principal place of business in the City of Denver, and is engaged in the business of exploration and development of oil and gas properties in various places and states, including Arkansas. The defendant, Dorsey M. Ryan, a geologist, is a citizen of the State of Arkansas and a resident of Fort Smith. Jurisdiction exists by reason of diversity of citizenship of the parties and the amount in controversy, 28 U.S.C.A. § 1332(a), (1964 Supp.).

The plaintiff in its complaint alleged that it had in the past two or three years employed the defendant in his capacity as a geologist. It is further alleged that on May 24, 1965, defendant called the plaintiff by telephone and represented that he, Ryan, owned substantial acreage in Township 4 North, Range 31 West, Sebastian County, Arkansas, and that he had offered the acreage for sale but had been unable to procure a buyer. He knew that the plaintiff had acreage in the vicinity and evidenced a desire to purchase the acreage so he could combine it with his own and make it more attractive to potential purchasers in the area. It is further alleged that the plaintiff specifically inquired of the defendant as to whether there had been any show of gas in a certain well being drilled in the vicinity by the Midwest Oil Corporation known as "Acme No. 1," and in reply thereto the defendant stated and represented that there had been a small show of gas but that it was of no significance.

In the complaint it is further alleged:

    "* * * Defendant knew that said representations
  were material and were made by him to the
  plaintiff with the intent that plaintiff would
  rely thereon, and that because of plaintiff's and
  defendant's prior relationship of trust and
  confidence, plaintiff was entitled to rely
  thereon. In addition thereto, the plaintiff
  inquired of the defendant as to the fair market
  value of oil and gas leasehold acreage in the
  vicinity of plaintiff's and defendant's leasehold
  interests. Defendant advised plaintiff that he
  was attempting to sell his acreage for $3.00 per
  acre, and that if he had both his acreage
  together with plaintiff's acreage, he would be
  able to sell the combined acreage for
  approximately $3.00 per acre. Defendant was
  insistent upon receiving reply as to plaintiff's
  willingness to sell said interest to him and
  plaintiff consented and agreed to sell the lease
  to the defendant in reliance upon defendant's
  material representations for the sum and amount
  of $3.00 per acre and the reservation of an
  overriding royalty interest of 2%.


    "Plaintiff, relying upon the representations
  made by the defendant, did proceed to execute its
  assignment of the oil and gas lease in question
  on the 25th day of May, 1965 to the defendant;
  and that attached hereto, marked Exhibit `D', and
  by this reference made a part hereof, is a true
  and correct copy of such assignment; that same
  was duly posted in the United States Postal
  Service to the defendant; that unknown to
  plaintiff at the time of defendant's
  representations to the plaintiff aforesaid, but
  well known to the defendant, the Midwest Oil
  Corporation gas well which was being drilled
  aforesaid, had a substantial show of gas with a
  flow of approximately eight million (8,000,000)
  cubic feet per day, and that leasehold acreage in
  the vicinity had a substantial value

  over and above $3.00 per acre; that the defendant
  did, on or about the 25th day of May, 1965, offer
  for sale said leasehold interest purchased from
  the plaintiff for $20.00 per acre, and on or
  about the same date did accept a counter offer of
  $17.50 per acre and a 1% overriding royalty
  interest and immediately upon receipt of said
  leasehold acreage the defendant in turn assigned
  same to the person who purchased from him and
  received a profit of $14.50 per acre and a 1%
  overriding royalty interest as a result thereof;
  thus, because of the defendant's representations
  and the fraud practiced upon plaintiff, the
  defendant unjustly enriched himself in the sum
  and amount of $20,171.24 and a 1% overriding
  royalty interest and that the plaintiff
  accordingly has been damaged in said sum and
  amount and interest, since the market value of
  said lease acreage was not $3.00 per acre as
  represented by defendant to plaintiff, but in
  fact had a fair market value of at least $17.50
  per acre. Plaintiff is accordingly entitled to
  Judgment against the defendant for the sum and
  amount of $20,171.24 and an assignment of
  defendant's one percent (1%) overriding royalty

The defendant in his answer of August 10, 1965, denied generally every material allegation in the complaint and prayed that the complaint be dismissed and that plaintiff take nothing.

On December 9, 1965, the case was tried to the court without the intervention of a jury, and at the conclusion thereof was submitted subject to the receipt of briefs by the parties. The briefs in support of the parties' respective contentions have been received and considered along with all the evidence adduced at the trial, and this opinion, containing the findings of fact and conclusions of law, is filed as authorized by Rule 52(a), Fed.R.Civ.P.

The defendant, Ryan, was initially contacted by the plaintiff, Consolidated Oil & Gas, Inc., in April 1963. The defendant, as a consulting geologist, had been recommended to plaintiff to do some evaluation work in the western Arkansas area. He was commissioned to write a report and make evaluation of certain properties in the Arkoma basin area. For this work he was paid $800. He did other evaluation work on a job-by-job basis and was paid $583.67 for a supplemental report. He was the well geologist on a well drilled by plaintiff, and on December 15, 1964, sent statement to plaintiff, for which he was paid $10 per hour for his office analysis of the samples and $75 a day for his visits to the well site. The total paid defendant on this job was $502.50. Defendant was not a regular day-to-day employee of plaintiff and was paid no salary. On May 14, 1965, defendant bought 971 acres of leases at $3.00 per acre on the Atkins anticline. Sometime prior to the drilling of Acme No. 1, which was spudded on April 26, 1964, defendant had offered $1.00 per acre for the instant acreage.

On May 20, 1965, defendant again contacted plaintiff by telephone relative to curative title work on the Atkins leases. In the same conversation he offered to pay $3.00 per acre for the leases involved herein. Midwest's "Acme No. 1" well had had a show of gas in the early morning hours prior to that phone conversation. An agreement was made to sell the lease to defendant during the telephone conversation of May 20, 1965, and on May 25, 1965, the necessary assignments were executed and transmitted the next day. After purchasing the lease by telephone, defendant subsequently contacted Humble Oil, Midwest Oil, Shell Oil, Wilshire Oil and Steve Goss with a view to selling it. Ryan made an offer to sell the acreage at $20 to $25 an acre. Steve Goss and associates on May 25, 1965, agreed to and did purchase the acreage at $17.50 per acre.

The plaintiff contends that it should recover the profit Ryan made on the lease purchased from it and sold to Goss because (1) the defendant breached the confidential relationship and trust existing between the parties, and (2) the defendant fraudulently procured the lease by misrepresenting the facts with respect to the show of gas in Midwest "Acme No. 1", and thereby deceived plaintiff.

The defendant contends that he did not misrepresent in any manner the facts as he knew them and as they existed on the morning of May 20 when he contacted plaintiff, and further that his employment by plaintiff was on a sporadic job-by-job basis and there was no continuing relationship which created any high degree of trust. In substance, the defendant takes the position that the parties negotiated the purchase and sale of the lease at arm's length, and that there were no misrepresentations of any kind, nor was there any duty to disclose what information the defendant had to the plaintiff.

As the court views the record, the issues as raised by the pleadings and the evidence adduced at the trial and the briefs are (a) whether or not a confidential relationship existed between the plaintiff and defendant and was breached by the defendant, and (b) whether or not the ...

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