Roy L. Stinnett v. Damson Oil Corporation

648 F.2d 576

• Court: Court of Appeals for the Ninth Circuit
• Decided: May 28, 1981
• Docket: 78-2815
• Status: Published

Opinions

MARKEY, Chief Judge.

Roy L. Stinnett (Stinnett) appeals from a final judgment of the District Court for the Central District of California in this suit for breach of contract against Damson Oil Corporation (Damson). We reverse.

Background

Underlying this litigation are tide and submerged oil and gas leases in the Venice Oil Field in Los Angeles County, California, together with equipment used in operating the field (collectively, the Property). As of July, 1975, the Property included seven oil and gas wells, producing approximately 400 to 450 barrels per day. The oil was subject to price regulations established under the Federal Energy Administration (FEA).

On July 21,1975, Stinnett, doing business as the Stinnett Oil Company, entered an Acquisition Agreement, contracting to buy the Property from Mobil Oil Corporation (Mobil). In August, 1975, Stinnett paid Mobil a deposit of $100,000 toward the $1,000,-000 purchase price but, before Mobil could close the sale it had to obtain consent from the City of Los Angeles (City) to assign one of the leases. The transaction was scheduled to close after that consent was obtained.

Stinnett arranged to borrow the $900,000 balance of the purchase price from United California Bank (UCB). On November 6, 1975, City consented to assignment of the lease.

Meanwhile, Damson had become interested.. On December 11,1975, Stinnett accepted terms for the preparation of a Basic Agreement under which Damson would acquire Stinnett’s position in the Mobil Contract. On December 31, 1975, the Basic Agreement was entered into by Stinnett, Damson, and a recently formed corporation which became subsidiary of Damson (Subsidiary).¹ Under that agreement, Damson acquired Stinnett’s position in the July 21, 1975, Acquisition Agreement with Mobil. The Basic Agreement acknowledged a Stock Purchase Agreement of even date, under which Stinnett sold his 99 shares in Subsidiary to Damson for $99. The Basic Agreement also recited that:

Concurrently herewith [Subsidiary] is acquiring from Mobil the Property in consideration of $1,000,000, payable $800,000 in cash and $200,000 by an unsecured promissory note (the “Note”) from [Subsidiary] to Mobil.

In connection therewith, [Subsidiary] is borrowing $800,000 from United California Bank (“UCB”) secured by a deed of trust (the “Trust Deed”) on the leasehold estate conveyed to [Subsidiary] by the Leases, and the Note, secured by the Trust Deed, is guaranteed by Damson.

In consideration of Stinnett’s arranging the sale of the Property from Mobil to Subsidiary and the sale of Stinnett’s stock in Subsidiary to Damson, Damson agreed in the Basic Agreement to pay to Stinnett:

(a) 12,500 shares of Damson common stock;

(b) Cash in an amount not to exceed $30,-000 as reimbursement for Stinnett’s expenses in connection with acquisition of the Property from Mobil; and

(c) A five percent (5%) overriding royalty subject to specified terms and conditions.

The Basic Agreement recognized that, because of the Energy Policy and Conservation Act (Act), enacted December 22, 1975, the economic return on the investment by Damson and Subsidiary could be materially and adversely affected. Accordingly, Damson and Subsidiary reserved the option to rescind the acquisition of the Property from Mobil if the FEA did not promulgate regulations by March 1, 1976, or if price regulations promulgated before that date did not meet specified criteria.

As part of the option to rescind, Subsidiary and Mobil entered into a Repurchase Agreement, also dated December 31, 1975, whereby Mobil agreed to repurchase the Property from Subsidiary in the event of adverse FEA regulations. In that event:

[Subsidiary] shall have the option, in its sole discretion, within 15 days following promulgation of such regulation or March 1, 1976, whichever first occurs, to give written notice to Mobil of [Subsidiary’s] election to exercise its rights hereunder, and, thereupon the parties hereto covenant and agree to take the following actions on the tenth (10th) day next following receipt of the aforementioned notice:

(a) [Subsidiary] shall reassign the Leases and reconvey the Personal Property to Mobil in the same form as the conveyances of the Property from Mobil to [Subsidiary].

(b) Mobil shall return the Note to [Subsidiary], and no interest shall be due or payable on the principle thereof for any period during which Mobil held the Note.

(c) Mobil shall pay to [Subsidiary] the sum of $800,000 in full consideration for the reconveyance of the Property from [Subsidiary] to Mobil.

' (d) [Subsidiary] shall pay to UCB the sum required to secure the full reconveyance of the Trust Deed, and shall secure such reconveyance and file same for recording concurrently with the recording of reconveyance of the Leases.

In early February 1976, the FEA promulgated regulations not meeting the criteria specified by the parties. On February 11, 1976, Subsidiary gave written notice to Mobil of its election to rescind. However, Mobil did not want to repurchase the Property. It therefore entered into discussions with Subsidiary and Damson about modifying the transaction in view of the Property’s reduced value. Mobil and Subsidiary amended the Repurchase Agreement, extending the time within which Subsidiary could exercise its rescission rights until April 1, 1976.

On March 25,1976, Subsidiary again gave Mobil written notice of its election to rescind. On the same day, howevér, Subsidiary sent a separate letter to Mobil, offering to purchase the Property for $100,000 cash, and requiring that Mobil buy all crude oil produced from the Property. In the alternative, Subsidiary offered to purchase the Property and certain pipeline facilities owned by Mobil for the sum of $200,000. Except for the reduced price, Subsidiary proposed that other terms of sale remain as stated in the Basic and Repurchase Agreements dated December 31, 1975.

On April 9, 1976, Subsidiary and Mobil entered into a Price Reduction Agreement whereby:

1. In consideration of the waiver by [Subsidiary] of its right to rescind the purchase of the Property, the price for the Property shall be reduced to the following:

a. $100,000 cash, and the parties hereto agree to enter into an agreement for the sale by [Subsidiary] to Mobil of all crude oil produced from the leases on the same terms and conditions of that certain crude oil contract, Mobil Contract No. 1284, between the parties and dated December 31, 1975;

or, in the alternative:

b. $200,000 cash for the Property and the pipeline facilities, as hereinafter described. ..

On May 7, 1976, Mobil formally accepted the second alternative (sale of the Property and pipeline for $200,000).

In a letter to Stinnett dated May 20, 1976, Damson asserted that Subsidiary had exercised its right to rescind acquisition of the Property. At the same time, Damson informed Stinnett that Subsidiary had acquired the Property at a substantially reduced price, adding:

[I]t is still our intent to recognize your original contribution to the locating of this property. Although the terms of our original agreement with you are clearly no longer in force, we are prepared to reach agreement with you on an appropriate consideration recognizing the substantially reduced value of the property.

Stinnett, refusing to accept Damson’s unilateral pronouncement that the terms of his original agreement were “no longer in force,” demanded payment of the consideration set forth in the Basic Agreement of December 31,1975. When Damson refused, Stinnett brought this suit for breach of that Agreement.

The action was tried without a jury on May 24, 25, and 26,1978. On June 21,1978, the court entered findings and conclusions, of which those relevant on this appeal are: Finding of Fact

18. Plaintiff and defendant did not mutually intend or agree that plaintiff would receive the consideration set forth in the December 31st Agreement so long as [Subsidiary] ultimately acquired the property, regardless of the price paid for the property.

Conclusions of Law

2. Damson’s failure to convey to plaintiff the consideration set forth in the December 31st Agreement did not constitute a breach of that Agreement because [Subsidiary] timely elected to rescind the acquisition of the property from Mobil, and [Subsidiary] and Damson exercised their right under Paragraph 1 of the December 31st Agreement to be relieved of the obligation to convey to plaintiff the consideration set forth in that contract.

3. Plaintiff was entitled to receive the consideration set forth in the December 31st Agreement only in the event that [Subsidiary] did not elect to rescind the acquisition of the property under the conditions of the Repurchase Agreement. By its actions and through its agreements with Mobil during the period from March 25, 1976 through May 7, 1976, [Subsidiary] elected to rescind the acquisition of the property within the meaning of the December 31st Agreement. The Agreement entered into with Mobil for the acquisition of the leases, equipment and pipeline was a new agreement and not merely a modification of the previously existing agreement between Mobil and Company regarding the acquisition of the property.

4. [Subsidiary] rightfully and properly elected to rescind the acquisition of the property within the time period set forth in the Repurchase Agreement, as amended by Mobil and [Subsidiary], and a rescission was accomplished in substance.

9. Plaintiff is entitled to reasonable compensation for his efforts in arranging the sale of the property from Mobil to [Subsidiary], and, therefore, is entitled to judgment on the Sixth Count of his complaint in the sum of $10,404.96 against Damson.

Issues

The issues on appeal are whether: (1) Subsidiary and Mobil rescinded the acquisition of the Property; (2) Subsidiary and Mobil entered into a novation; and (3) Stinnett was merely a “finder.”

OPINION

Scope of Review

Suit was brought on the Basic Agreement and on the rights and obligations arising therefrom. Interpretation of that agreement requires consideration of the circumstances surrounding its negotiation and execution, other agreements executed in relation to that transaction, and the conduct of the parties after execution of those multiple agreements. See Restatement (Second) of Contracts § 238 (1973).

Damson says the clearly erroneous standard is applicable, pointing to Bauge v. Crown Life Insurance Co., 473 F.2d 787, 788 (9th Cir. 1972) and cases cited therein.

The standard and Fed.R.Civ.P. 52(a) apply to findings of fact, not to conclusions of law. Here there is no factual dispute on what the agreements say or on what the parties did. Dispute centers on the legal effect on Stinnett’s rights of agreements entered by Subsidiary and Mobil, and on the intent of Stinnett and Damson when they executed the Basic Agreement. The district court labeled its rescission determination a conclusion and its intent determination a finding. Assuming without deciding that the standard applies to those determinations, whatever their label, we are, on the entire evidence, “left with the definite and firm conviction that a mistake has been committed.” United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948).²

Specifically, the determinations: (1) that Subsidiary rescinded acquisition of the Property; and (2) that the parties intended that Stinnett receive a different consideration if acquisition occurred at a different price, are clearly erroneous.³ They are clearly erroneous not because they are contrary to the weight of the evidence, but because they are wholly unsupported by evidence. United States v. Johnson, 327 U.S. 106, 111-12, 66 S.Ct. 464, 466, 90 L.Ed. 562 (1946); Fairmount Glass Works v. Cub Fork Coal Co., 287 U.S. 474, 53 S.Ct. 252, 77 L.Ed. 439 (1933).

(1) Subsidiary and Mobil did not rescind the acquisition of the Property.

Rescission is the “[annulling or abrogation or unmaking of [a] contract and the placing of the parties to it in status quo. It necessarily involves a repudiation of the contract and a refusal of the moving party to be further bound by it.” Black’s Law Dictionary 1472 (revised 4th ed. 1968) (citations omitted).

Under the Basic Agreement dated December 31, 1975, Damson had only two options. If FEA did not promulgate regulations by March 1, 1976, or if regulations promulgated earlier did not meet specified criteria, Subsidiary could elect “as set forth in the Repurchase Agreement between Mobil and [Subsidiary], to rescind ]the acquisition of the Property,” and Damson could walk away from the deal. In that event, it would be relieved of any obligation to pay Stinnett the agreed consideration of common stock, expenses, and royalty. On the other hand, if Subsidiary elected not to rescind the acquisition within the period stated in the Repurchase Agreement, Damson was obliged under the Basic Agreement to pay Stinnett the agreed consideration. Damson at no time prior to its acquisition of the Property attempted to negotiate with Stinnett any modification of its obligation to pay the agreed consideration.

As set forth in the Repurchase Agreement, Subsidiary could exercise its option to rescind the acquisition by giving written notice to Mobil,

and, thereupon the parties hereto covenant and agree to take the following actions on the tenth (10th) day next following receipt of the aforementioned notice:

(a) [Subsidiary] shall reassign the Leases and reconvey the Personal Property to Mobil in the same form as the conveyances of the Property from Mobil to [Subsidiary].

(b) Mobil shall return the Note to [Subsidiary], and no interest shall be due or payable on the principal thereof for any period during which Mobil held the Note.

(c) Mobil shall pay to [Subsidiary] the sum of $800,000 in full consideration for the reconveyance of the Property from [Subsidiary] to Mobil.

(d) [Subsidiary] shall pay to UCB the sum required to secure the full reconveyance of the Trust Deed, and shall secure such reconveyance and file same for recording concurrently with the recording of reconveyance of the Leases.

Those formal and specific acts of rescission were expressly set forth in the Repurchase Agreement and would have returned the parties to the status quo. They never happened.

That rescission never occurred is confirmed by other facts as well. Thus, under the Basic Agreement of December 31, 1975,

Upon completion of the repurchase of the Property by Mobil, as contemplated in the Repurchase Agreement . .. Stinnett shall purchase from Damson, and Damson shall sell to Stinnett, all of the shares of common stock of [Subsidiary] for the sum of $100, which transfer by Damson shall be without representation or warranty of any kind or nature.

That stock transfer never occurred.

Moreover, Subsidiary’s February 11 letter of rescission was nullified by the agreement to extend the time for rescission, and, although Subsidiary purportedly exercised a right to rescind the acquisition in a letter to Mobil of March 25, 1976, it simultaneously offered in its other letter of the same date to acquire the Property, albeit at a reduced price. That Subsidiary did not rescind was recognized in the Subsidiary-Mobil Price Reduction Agreement of April 9, 1976: “In consideration of the waiver by [Subsidiary] of its right to rescind the purchase of the Property, the price for the Property shall be reduced to the following . ... ” (Emphasis added)

Manifestly, as events unfolded beginning in February, 1976, Subsidiary did not elect to rescind the acquisition of the Property; it elected to negotiate the acquisition at a reduced price. In this endeavor, it succeeded.⁴ For when Mobil accepted Subsidiary’s offer to buy the Property at a reduced price, there was created, not an agreement for the restoration of the status quo, but a modified executory agreement to convey and acquire the Property. See Young v. New Pedrara Onyx Co., 48 Cal.App. 1, 192 P. 55 (Cal.App.1920).

(2) Subsidiary and Mobil did not enter into a novation.

Damson argues that the Price Reduction Agreement between Subsidiary and Mobil dated April 9, 1976, constituted a novation, effective to extinguish all rights and obligations under the Repurchase Agreement of December 31, 1975. It follows, says Damson, that it no longer owes Stinnett the consideration agreed upon in the Basic Agreement dated December 31, 1975. The argument lacks merit.

Calling the Price Reduction Agreement a “novation” is a self-serving mischaracterization of that agreement. Alteration of some details of a contract, while leaving undisturbed its general purpose (here, conveyance and acquisition of the Property), constitutes a mere modification of the original contract, and the latter remains in force as modified. See Travelers Insurance Co. v. Workmen's Compensation Appeals Board, 68 Cal.2d 7, 64 Cal.Rptr. 440, 434 P.2d 992 (1967). The $200,000 final price paid by Subsidiary to Mobil was part of the $800,-000 cash paid to Mobil at the December 31, 1975 closing, that'$800,000 being the proceeds of a loan made to Subsidiary by UCB on the closing date. That loan was never discharged, but simply reduced from $800,-000 to $200,000 by the expedient of Mobil returning $600,000 cash to UCB, a fact highly probative of the continuity between the December 31, 1975 acquisition of the Property by Subsidiary, and the Price Reduction Agreement of April 9, 1976.

Further, if there had been a “novation,” it could not have affected the rights of Stinnett, who was not a party to the negotiations or agreements between Subsidiary and Mobil culminating in modification of the original transaction. See 66 C.J.S. Novation § 22 (1950); Joseph Meinick Building & Loan Ass’n v. Meinick, 361 Pa. 328, 64 A.2d 773 (1949). Stinnett bargained at arm’s length for the consideration specified in the Basic Agreement of December 31, 1975. He had a right to rely upon Damson’s promise to pay that consideration. It is fundamental that the purpose of every contract is to bind the parties to performance and to place the risk of performance upon the promisor. 17 C.J.S. Contracts § 1(2) (1963). Subsidiary, on the other hand, had no right to so maneuver with Mobil for a new deal as to freeze Stinnett out of his right to receive the agreed consideration, or to free its parent Damson of its obligation to pay that consideration.⁵

(3) Stinnett was not merely a “finder”.

The record belies Damson’s assertion that Stinnett was merely a “finder,” entitied only to a “finder’s fee” based on a percentage of the actual purchase price. Stinnett, an experienced oil and gas operator, personally entered into the original Acquisition Agreement with Mobil of July 21, 1975, obligating himself to pay $1,000,000 for the Property. Mobil accepted Stinnett as a principal, after checking his net worth through Dun & Bradstreet. From his own funds, Stinnett paid a $100,000 deposit against the purchase price, and personally arranged to borrow the $900,000 balance from UCB, which committed to finance the transaction before Damson ever appeared on the scene.

In addition, in the event the Damson/Mobil deal collapsed, because of adverse FEA regulations, Stinnett would not have simply forfeited a fee (conventionally, all a “finder” receives). He was obligated in that event to: (1) have Damson released from its guaranty of the $800,000 UCB bank loan; and (2) pay the interest on that loan from December 31, 1975, to the date on which it was discharged.

Nor is that all. Characterizing Stinnett as a “finder” ignores the Basic Agreement of December 31,1975, under which the consideration flowing to Stinnett was in exchange not only for his arranging the sale from Mobil to Subsidiary, but also for “the sale of the stock of Stinnett in [Subsidiary] to Damson.” Although Stinnett made that stock sale, he has not received the agreed consideration set forth in the Basic Agreement.

Conclusion

Stinnett was not a “finder.” He was a principal who had made the July 21, 1975, Acquisition Agreement with Mobil. Damson, seeking to stand in his shoes, agreed to pay him 12,500 shares of Damson stock, reimbursement of expenses, and an overriding royalty. Damson was protected by an escape clause whereby, if the FEA promulgated adverse price regulations, Damson could rescind the acquisition, that is, it could walk away from the deal. Damson did not, however, walk away. Nor did it pay the agreed consideration. Instead, through Subsidiary, it negotiated with Mobil and did acquire the Property, albeit at a reduced price. Subsidiary and Mobil thus never rescinded the acquisition of the Property. Nothing of record evidences any intent on the part of Stinnett to accept less than the agreed consideration if Damson acquired the Property at a different price. In concluding that Damson’s failure to pay the agreed consideration was not a breach of the Basic Agreement of December 31, 1975, the district court clearly erred. Its judgment must, therefore, be reversed and remanded for further proceedings consistent with this opinion.

REVERSED.

1 . Shortly before closing, a California corporation was incorporated named “The Stinnett Oil Company,” with 99 shares of stock issued to Stinnett and one share to Damson. At closing, Stinnett transferred all his shares to Damson and the Property was conveyed from Mobil to this corporation, which then became a subsidiary of Damson. By forming this corporation and calling it “The Stinnett Oil Company,” the parties avoided waiting for City’s further consent to an assignment of the lease to a new purchaser.

“The Stinnett Oil Company” is referred to as “Subsidiary” throughout the remainder of this opinion to avoid confusion with Stinnett the person or with the name under which he was doing business when he entered the original contract with Mobil on July 21, 1975.

2 . With the flow of appeals at floodtide, the beneficial effect of Rule 52(a) is enhanced. Nonetheless, the raison d’etre of an appellate tier would be undermined were it incapable of correcting clear error. When the sea of litigation surfaces clear error below, reversal in adherence to Rule 52(a) does not diminish the tide-stemming function of the Rule.

3 . It may have been Damson’s intention, at some stage, that Stinnett would not receive the agreed consideration. As the record makes plain, that was never Stinnett’s intention. Nor does any such intention of Damson correspond to what the Basic Agreement says or to any conduct of Stinnett before or after execution of the Agreements. There is thus no evidence that the parties intended anything but what the Basic Agreement provides.

Damson says it is unreasonable for Stinnett to expect the agreed consideration when the price of the Property was changed from $1,000,000 to $200,000. It did not, however, present that concept to Stinnett until after it acquired the Property. Nor does it say whether Stinnett could have expected twice the agreed consideration if the price of the Property had been changed to $2,000,000. The Basic Agreement simply does not relate the consideration due Stinnett, in any manner, to the price paid for the Property.

4 . It is at least incongruous for Damson, which did acquire the property, to argue that it rescinded “the acquisition.” Nothing in the Basic Agreement speaks of rescinding a contract, the sole option provided therein being an option to rescind the acquisition of the Property. There is simply no evidence that Damson rescinded the acquisition of the Property.

5 . The record does not reflect Damson’s reasons for not approaching Stinnett to seek a change in the agreed consideration if it acquired the Property at a lower price, or whether it feared that Stinnett would, if so approached, insist on Damson’s rescission of the acquisition and a resultant opportunity of Stinnett to purchase the Property at a lower price. The important fact is Damson’s failure, whatever its reasons, to seek a change in the agreed consideration.