ON PETITION FOR REHEARING
DAN LEE, PRESIDING JUSTICE, FOR THE COURT:
The original opinion in this case was handed down June 3, 1988, affirming the learned chancellor as to all points and all parties. In due course, Wilmena W. Whittington (Appellant) filed a petition for rehearing alleging that the Court had erred in
affirming as to the award of punitive damages of $40,000, as well as two other assignments of error. We find the petition for rehearing is well-taken as to the affirmance of the allowance of punitive damages, when no net worth of appellant had been established, but find no merit as to the other alleged errors. We withdraw the original opinion, modify it to deny punitive damages and hand down the following as the opinion of the Court.
On April 9, 1974, Clyde Whittington (Clyde) conveyed by quitclaim deed to Wilmena Whittington (Wilmena) all of his land, reserving one-quarter (1/4) of one-eighth (1/8) of eight-eighths (8/8) royalty, and one-quarter (1/4) of any bonus or delay rentals received on any lease which Wilmena should execute in the future on the minerals. The reservation was binding on all subsequent lessees and grantees. Clyde conveyed to Wilmena all rights to execute leases. On August 1, 1983, Clyde and Freddie G. Whittington filed suit in the Chancery Court of Amite County against Wilmena, Edward B. Launius, Robert R. Jacobs, Oil Star Corporation, Donald L. Smith, Tri-M Corporation, Coquina Oil Company, Thomas G. Kleinpeter, and some 28 other assignees of Wilmena to recover one-fourth (1/4) of the bonus consideration for a ten-year paid-up oil and gas lease executed by Wilmena to Edward B. Launius in 1975. Clyde alleges that Wilmena fraudulently concealed the bonus, in the form of a 5% overriding royalty interest and one-half (1/2) of the working interest retained in the lease by Launius, in a side-letter agreement entered into between her and Edward B. Launius on the same day as the oil and gas lease was executed.
Wilmena counter-claimed against Clyde, alleging she had no duty to tell him she had leased the property. Wilmena also cross-claimed against Launius, Jacobs, Oil Star, Tri-M, Smith, and Coquina, alleging fraud in that Launius concealed from her one-half (1/2) of the profits and working interest she was entitled to pursuant to the first of two side-letter agreements between Wilmena and Launius whereby she would share equally in profits from promoting the lease and any working interest retained by Launius.
Thomas Kleinpeter cross-claimed against Wilmena, alleging he is entitled to one-half (1/2) of said bonus by virtue of her conveyance to him in April 1977 of all the surface acres and one-half (1/2) of the mineral acres of the estate conveyed to her by Clyde.
Appropriate answers were filed as to all of these complaints. Pursuant to various motions for summary judgment and arguments thereon, Chancery Judge R. B. Reeves, in a pre-trial hearing, ruled that the obligation to make payments from the lease to Clyde was Wilmena's responsibility as sole owner of the
executive rights, and her failure to do so in no way affects subsequent owners of the lease. He also granted the summary judgment motions in favor of several of the defendants because they were bona fide purchasers of their various interests in the lease. Wilmena's counter-claim against Clyde was struck as immaterial and irrelevant.
At the close of the pre-trial hearing on motions, the parties to the lawsuit were aligned as follows: Clyde Whittington claimed against Wilmena Whittington, Edward B. Launius, Robert R. Jacobs, Oil Star, Inc., Harold D. Baker, Thomas G. Kleinpeter, Tri-M Petroleum Company, Donald L. Smith and Coquina Oil Corporation. Wilmena Whittington cross-claimed against Launius, Jacobs, Oil Star, Tri-M Petroleum, Donald L. Smith and Coquina Oil Corporation. Thomas Kleinpeter cross-claimed against Wilmena Whittington. The complaint of Clyde Whittington against Edward B. Launius, and the cross-claim of Wilmena Whittington against Edward B. Launius were amended to claim against the estate of Edward B. Launius, John P. Weeks, Administrator C.T.A., because Edward B. Launius died four days after the original complaint was filed.
The facts, as adduced during seven days of trial, including some 103 exhibits, follow.
On April 9, 1974, the same day he was granted a divorce from Wilmena Whittington, Clyde Whittington conveyed to Wilmena all of his land, including the mineral estate, reserving one-fourth (1/4) of one-eighth (1/8) of eight-eighths (8/8) non-participating royalty. All rights to execute leases were also conveyed to Wilmena in return for one-fourth (1/4) of any bonus or delay rentals received for the execution of any future leases. These reservations were binding on all subsequent lessees and grantees. The conveyance was recorded in Amite County, Mississippi. In 1982, Clyde became aware that drilling had commenced on the property when he drove by and saw the rigs. Without contacting anyone about the status of any bonus payment that might be due him, Clyde filed this lawsuit against Wilmena and some 38 assignees of the lease interest to recover his share of the bonus, and asked for punitive damages against Wilmena for fraudulently concealing the bonus she received for executing the lease.
On April 3, 1975, Wilmena leased all her minerals to Edward B. Launius in a paid-up lease with a primary term of 10 years, reserving a one-eighth (1/8) royalty. The bonus stated
on the face of the lease was $10. The lease was recorded in Amite County. On the same day, Wilmena entered into an unrecorded side-letter agreement with Launius that stated that, as a bonus for executing the lease, Launius would at some time in the future give Wilmena a one-sixteenth (1/16) overriding royalty, one-half (1/2) of all the money he received for promotion of the lease, and one-half (1/2) of any working interest Launius retained in promotion of the lease.
On April 25, 1977, Wilmena sold all her surface estate and one-half (1/2) of her mineral estate to Thomas Kleinpeter, subject to all prior reservations and leases. This conveyance was recorded in Amite County. The warranty deed does not except bonus payments; however, Kleinpeter was not aware that the minerals were leased to Launius and was not aware of the side-letter agreement which provided for bonus, when he bought the property. Kleinpeter did not check any land records before he purchased the property, but accepted the Federal Land Bank's mortgage record that the title was clear. Although Kleinpeter did not expect to receive any royalty when he purchased the property since he was not aware that the minerals were leased, he has been receiving royalty checks since production was obtained from the wells.
On April 28, 1978, Launius assigned the" Wilmena "lease to Oilstar Corp., a corporation solely owned and operated by Launius. On June 27, 1978, Oilstar assigned the" Wilmena "lease to Coquina Oil Corp., reserving a 7-1/2% overriding royalty. Coquina paid Oilstar $25,000 for the lease, which Launius kept as his expenses in promoting the lease. Thereafter, Coquina discovered a title failure on 137.5 acres under the lease, which Launius could not reimburse, so Coquina bought leases from the holders of the 137.5 acres. Coquina did not record the lease from Launius for four and one-half (4 1/2) years, because there was no landman in Coquina's Jackson office; their Midland, Texas office had the lease; and everyone forgot about it. Furthermore, Coquina was not particularly interested in developing the lease acres, so there was no push to complete an entire drilling block, which is customary in the industry to do before recording leases. However, all of the clean-up leases obtained by Coquina were recorded in October 1978. At the time it bought the" Wilmena "lease, Coquina had no knowledge of the collateral agreement between Wilmena and Launius; therefore, Coquina asserts it had no responsibility to inform Wilmena it had the lease. (The trial court granted summary judgment on this particular issue as to Coquina.) There was no agreement between Launius and Coquina that Coquina would not record the lease in order to conceal the fact that Launius had sold the lease for $25,000.
On July 24, 1978, Launius and Wilmena entered into a second
letter agreement whereby Launius would pay Wilmena, as a bonus, a 5% overriding royalty (reduced from the original one-sixteenth or 6.25%) and one-half (1/2) of any working interest he retained in the lease. They dropped the requirement that Launius would pay her one-half (1/2) of the revenue from promotion of the lease. Wilmena claims that Launius tricked her into signing this second letter agreement by telling her that this paper was one of a stack of papers she must sign in order to correct the title description to exclude the 137.5 acres from the lease. Launius did not tell her he had assigned the lease to Coquina or that he had received $25,000 for the assignment. Neither did he tell her at that time that he had previously assigned the lease to Oilstar, his corporation. Wilmena claims she became aware of the second letter agreement only after this lawsuit was filed; therefore, she does not acknowledge the second agreement, and asked in her cross-claim against the Launius Estate for the terms of the original agreement - one-sixteenth (1/16) overriding royalty, one-half (1/2) profits for promotion of the lease, and one-half (1/2) of any working interest he retained. She also asked for one-half (1/2) of the $25,000 Launius obtained when he sold the lease to Coquina, since he sold the lease, in any event, before Launius tricked her into signing the second agreement. Furthermore, Wilmena contends that the second letter agreement should be invalid because there is nothing in Launius' files to indicate he gave consideration for the second letter agreement.
In 1980, Wilmena became discouraged about the oil prospects on her land, having received no money from the lease. She asked Launius for the lease back. On September 9, 1980, she received a letter from Launius telling her, finally, that he had sold the lease to Coquina. He calculated her royalty acres under both the terms of the lease to him and the assignment to Coquina. His calculations were based on a 5% overriding royalty, the terms of the second agreement, rather than 6 1/2% overriding royalty, the terms of the first agreement. It is not clear, however, that Wilmena knew how to calculate royalty acres such that this letter had any significance to her.
In early 1982 Launius approached his friend, fellow geologist, and oil and gas investor, Robert Jacobs, asking if Jacobs had a prospect in the Whittington acreage. Jacobs said he did, whereupon Launius told him that he, Launius, had sold his lease on the minerals to Coquina. At that point, they verbally agreed to form a partnership to develop the lease. Jacobs agreed to negotiate a farmout agreement with Coquina and work the prospect. In return Launius would split his 2-1/2% overriding royalty retained from the sale to Coquina, and he and Jacobs would split all expenses and profits 50/50. They did not discuss any of Launius' earlier difficulties with Coquina over the title failure of 137.5 acres, nor did they discuss any of the
details of Launius' side agreements with Wilmena.
Jacobs obtained the farmout agreement from Coquina on April 21, 1982, in his name only. On May 26, 1982, Launius and Jacobs signed a partnership agreement. Jacobs struck a two-well deal with Coquina; if he successfully drilled one well, Jacobs would earn three 80-acre units; if he successfully drilled the second well, he would earn the rest of the 1100 acres under the lease. He actually had to drill three wells before he earned the lease to all the acreage.
Jacobs took a 75% lease from Coquina because the lease was already burdened 20% - 7 1/2% to Launius, one-eighth (12 1/2%) royalty to Wilmena; Coquina retained a 5% overriding royalty. However, Jacobs claimed he did not know to whom the 20% burden belonged. He only knew that Launius had a 2 1/2% overriding royalty from somewhere, but Launius had told him nothing more about the terms of the original lease from Wilmena. Jacobs assigned his 75% working interest as follows: Williams Drilling agreed to buy in one-eighth (12 1/2%) for $65,000, which they deducted from drilling costs; Beau Coup Oil bought a 50% interest for $220,000. The turnkey price for drilling totalled $285,000, which was covered by the Williams Drilling and Beau Coup interests. Shields Resources bought 25% at $120,000, which was deposited in a Jacobs/Launius joint account as profit. Jacobs retained a 12 1/2% working interest for the joint venture. On December 22, 1982, Beau Coup Oil and Jacobs obtained a drilling permit for the Whittington Well #1.
The farmout agreement was not recorded, which Jacobs claims is the custom in the industry because no money changes hands. The one taking the farmout assumes the risk and expense of drilling. The interest in the lease is recorded after it is earned by successful drilling. At the time of the farmout Coquina was not aware that Launius and Jacobs were in a joint venture to promote the lease. Again, Jacobs claims it is not unusual in the industry to take a farmout in only one person's name, no matter how many people are involved in promotion of the lease.
The law firm of McKibben, Lake and Tolbert did the title work for Launius and Jacobs on Whittington Well #1. The title opinion notes the one-fourth (1/4) of one-eighth (1/8) of eight-eighths (8/8) royalty Clyde reserved in his conveyance to Wilmena. It does not, however, note the one-fourth (1/4) bonus reservation because the attorneys considered it clearly Wilmena's obligation to pay Clyde his share of any bonus since that obligation goes with the right to execute leases. The title opinion also includes Kleinpeter as 50% owner of the mineral estate. The farmout from Coquina to Jacobs was not reflected in
the title opinion, but all of the farmout lease owners were. The farmout agreement was eventually recorded on December 17, 1982. Before the wells began to produce, Coquina's assets were sold to Santa Fe by stock transfer. Coquina received no profits when production began.
On January 6, 1983, Launius and Jacobs took Don Smith into the joint venture as a partner, in return for Smith's seismic work on the lease. The three were to split as follows: 40% for Launius, 40% for Jacobs and 20% for Smith. Therefore, the 12 1/2% working interest Jacobs retained in the farmout went 5% to Launius, 5% to Jacobs, and 2 1/2% to Smith. Smith did not know about the Whittington lease, and he did not receive any share of Launius' 2 1/2% overriding royalty retained from his sale of the lease to Coquina.
On January 14, 1983, about a week away from logging in the first Whittington well, Launius, through Oilstar, assigned a 5% overriding royalty to Wilmena. Jacobs witnessed the assignment and it was the first time Jacobs was aware of any agreement between Launius and Wilmena. He understood the assignment to be something Launius held out for her. Wilmena claims, however, that she bought the 5% overriding royalty from Launius for $25,000 cash, and that Launius did not assign it to her as a bonus pursuant to their side-letter agreement. However, Wilmena obtained no receipt for the sale. She allegedly borrowed $25,000 in cash from her friend, E. E. Lawson, who brought the cash to her in a paper sack. Lawson took a promissory note from Wilmena which states that the money is to purchase overriding royalty. (The promissory note was introduced into evidence.) Wilmena repaid the money on March 31, 1983, in cash. There is no documentation as to where Lawson got the money because he kept it at home in his safe. Lawson likewise could offer no documentation as to where he put the money after it was repaid because he has hidden it in a different place now.
Wilmena claims she bought and sold this 5% overriding royalty because she had so far earned no money on her lease, and feared no production would come in. She did not want to be left with nothing. She did not connect the fact that if Launius sold her a 5% overriding royalty from the 7 1/2% overriding royalty he retained from the sale to Coquina, Launius would not have enough left to assign her a 6 1/4% overriding royalty (or 5% under the second agreement) pursuant to their side letter agreement when production came in. She never asked Launius about the bonus, but just assumed she would still get her overriding royalty even if she bought this 5%. Unfortunately, no one has any knowledge that Launius received $25,000 for this 5% overriding royalty, and there is nothing in his files or documents to indicate that he actually sold the overriding royalty. Wilmena sold her 5%
overriding royalty to Albert Newman on the acres where actual drilling was taking place for $8,800 the same day Launius assigned it to her. On March 16, 1983, she assigned her 5% overriding royalty under all the rest of the drilling sites to Harold Baker for $108,000.
On February 18, 1983, Launius assigned one-half of his 2 1/2% overriding royalty, retained from the lease sale to Coquina, to Jacobs, pursuant to their partnership agreement. Production on the Whittington wells came in on February 19, 1983, and by February 25, 1983, Launius, Jacobs and Smith had realized $86,000 profits for their joint venture, split 40%/40%/20%. Launius' share amounted to nearly $35,000. The 12 1/2% working interest which Jacobs had retained for the joint venture from the Coquina farmout was also split up - 5%/5%/2 1/2% - among Jacobs, Launius and Smith. Launius asked that his 5% working interest be assigned to Tri-M Petroleum, a joint venture composed of the law firm partners of McKibben, Tolbert and Lake. Two percent of the 5% went to the law firm as payment for Launius' outstanding legal fees. The other 3% was held by Tri-M as a bare trust for Launius. Tri-M also held title to the entire 5% for purposes of dealing with the drilling operators, Shields Resources, so that Shields would not have to contend with minuscule interests. Tri-M was not aware of Launius' side-letter agreements with Wilmena. Wilmena claims that one-half (1/2) of Launius' 3% working interest is hers. Neither Jacobs nor Smith were involved in any way with Tri-M.
On July 27, 1983, Edward B. Launius died. Four days later, August 1, 1983, Clyde filed his complaint. Production from the Whittington wells (about 13 in all) through March 1985 was logged in at 250,160 barrels at $28.19 per barrel, totalling $7,052,010.
1) Clyde v. Coquina Oil Company
Plaintiffs Clyde and Freddie Whittington failed to meet the burden of proof as to fraud or gross disregard for their rights, or that Coquina had any knowledge of any agreements between Wilmena and Launius. As to whether or not Coquina acted with gross disregard as to the plaintiffs by failing to record its assignment from Launius for some four years, the chancellor found that the failure to record was at Coquina's own peril and did not damage the plaintiffs. There was no proof that Launius conspired to commit fraud as to plaintiffs. Coquina was dismissed with its costs.
2) Clyde v. Jacobs, Smith and Tri-M
Any fraud by Launius could not be imputed to Jacobs, Smith or Tri-M, since he acted some eight years previously on his own in obtaining and selling Wilmena's lease. There was no proof that Jacobs, Smith or Tri-M had notice of any of these dealings with Launius and Wilmena. Smith was dismissed with his costs. The plaintiffs failed to establish by clear and convincing evidence ...