Appendix — Carpenter v. Glock (No. 889)

APPENDIX A

a ae

UNITED STATES COURT OF APPEALS

For the Sixth Circuit —

A. H. Carpenter, Et Al.,

v. No. 14,202

Wayne R. Glock, Et Al.

A. H. Carpenter, Et Al.,

v. No. 14,203

G. A. McDowell, Et Al.

A. H. Carpenter, Et Al.,

vy. No. 14,204 ©

Claude C. Johnson.

A. H. Carpenter, Et Al.,

v. No. 14,206

H. F. Garton.

A. H. Carpenter, Et Al.,

v. No. 14,207

Dean Williams, Et Al.,

A. H. Carpenter, Et Al., .

v. No. 14,208

R. R. Calvert, Et Al.

A. H. Carpenter, Et Al.,

v. No. 14,205

Robert E. Johnson.

JUDGMENT—January 13, 1961..

These consolidated cases hav been heard and con-’

sidered upon the extensive record and upon the briefs and

oral arguments of counsel for the parties; and

It appearing that the decision of the trial judge is

clearly set forth by him in his opinion-findings and con-

clusions; that his findings of fact in each case are sup-

ported by substantial evidence and are not clearly errone-

30

ous; and that his conclusions of law are correctly drawn

and based upon proper authority;

It is, therefore, ordered that the judgment of the United

States District Court in each. case be affirmed upon the

comprehensive findings, conclusions and opinion of Judge

Ford.

Enter:

. (s) John D. Martin,

United States Circuit Judge.

31

APPENDIX B

- ORDER DENYING REHEARING—March 10, 1961.

The Appellants’ Petition *for Rehearing is denied.

. (s) Jobn D. “Martin,

United States Cireuit Judge.

ORDER DENYING SUPPLEMENTAL PETITION FOR

REHEARING— March 13, 1961.

The Appellants’ Ricsherntd Petition for iene

- is hereby denied.

. | (s) John D. Martie,

United States Circuit Judge.

©

_ APPENDIX 0 :

__ UNITED STATES DISTRICT COURT

Eastern District. of Kentucky -

—

Wayne R. Glock, etal,

‘vy. No. 1033:

_ A. H. Carpenter, et al.

Raymond R. Calvert,

v. No, 1076

- &. Carpenter, et al..

Robert E. Johnson;

_ wv No.1046

A. H. Carpenter, et al.

Claude C. Johnson,

v. No. 1044

AHL Carpenter, et al..

Suen Williams, et al.,

v. No. 1072

A. HL Carpenter, et al.

G. A. McDowell, et al., z

vy. No. 1035

A. H. Carpenter, et al.

H. F. Garton,

v. No. 1048

A. H. Carpenter, et al.

‘Consolidated Cases.

- OPINION—Filed January 6, 1960.

Plaintiffs seek damages for fraud alleged to have been

practiced upon them by the defendant A. H. Carpenter and .

his agent, J. F. Shepperd, in inducing them to purchase

fractional working interests in .gas leases owned by the .

defendant Carpenter upon lands located in an area referred

to in the testimony as the “Furnace “Area” in Powell and

Estill Counties, Kentucky.

a

33

The above ‘entitled cases were consolidated for trial

and were tried to the: Court without. ™ intervention of a

jury:

The facts disclosed by. the record are in substance as

- follows: -

South Central Petroleum Corporation, ef which the

defendant A. H. Carpenter was president, owned a gas

_ lease located ‘in the Furnace Area in Estill county upon the

farm of J. M. Garrett.

Commencing on August 12, 1947, the South Central —

Petroleum. Corporation, with Carpenter in charge as con-—

tractor, drilled a gas well upon the Garrett lease. The

well was completed September 30, 1947, and it had the

appearance of. substantial. gas production. This well.is -

known and referred to in the record as “Garett No. 1” and _

it is also referred to as ‘the “discovery: well.” + _

On October 7, 1947, at the invitation of Mr. Carpenter, _

W. B. Maxwell, manager of the Geology Department of the

United Fuel and Gas Company, Charleston, W. Va., made

a field test of the gas in Garrett No. 1 which revealed the

gas from this well to be contaminated in that it was 45%

carbon dioxide, a ga: which would not barn, and con-

. tained 300 grains of hydrogen sulfied, a corrosive, per hun-

- dred cubic feet, all of which was promptly reported to Mr.

Carpenter, together with the information that United Fuel

would not purchase the gas from this well so contaminated

unless the contamination were removed. Mr. Maxwell

later mailed to Mr. Carpenter a copy of the laboratory

analysis which confirmed the field analysis.

For the same corporation and upon the same farm Mr.

Carpenter completed the drilling of a second gas well on

- December 14, 1947, referred to.in the evidence as Garrett

No. 2, the test of which showed the gas from it to be con-

. taminated to the same extent as-Garrett No. 1. Mr.

Carpenter. made a diligent investigation as to the prospect —

of cleaning the contaminated gas produced from these

wells. The high cost of such enacts was obviously quite

prohibitive. «~

Shortly, after Garrett No. 1 was completed and tested,

. Mr. Carpenter by his agent, J. F. Shepperd, inaugurated

an energetic campaign to sell fractional working interests

to the plaintiffs, all of whom: resided out of the State of

Kentucky, in gas leases which Carpenter individually ac-

quired ‘in a large area in the general neighborhood of the

Garrett farm, known as the “Furnace Area”, which leases

were upon farms referred to in the record as the “Hood

Wise” lease, “Elbert Wass6n” lease, “Ida Barnes Nicholas”,

lease, “Tipton” lease, “James Smyth” lease, aie “Hall”

lease, and “Pete Wells” lease. ?

During the course of the procedure to induce plaintiffs

to invest in these leases, the various plaintiffs,. sometimes

accompanied by Mr. Shepperd, visited Mr. Carpemter’ at

Winchester, Kentucky, and were conducted on tours of in-

- spection of the so-called gas field and on such occasions.

Mr. Carpenter represented that the well known as Garrett

No. 1 signified an enormous gas discovery in that area;

that the gas produced was pure, sweet, premium gas and

all that needed to be done to realize a large profit was. to

turn it into a pipeline and put meters on the wells; that

the gas could be marketed readily; that a gas transmission

company would be willing to put in a pipeline to take the

gas; aud that a fabulous profit could be realized by in-

vestors in the wells. There is testimony indicating that

Shepperd made representations similar to those made by

Carpenter io induce plaintiffs to invest in the leases and

that Carpenter said he would back up and stand behind

anything Shepperd said in regard to the wells. Carpenter

and Shepperd met“with some of the plaintiffs in Indiana,

where most of them resided, and made substantially the

' same representations in respect to the quality of the gas

35

and the enormous profits to be derived from investments

- in fractional working interests in the wells being drilled

and proposed to be drilled in the Furnace Area.

' These representations related, to matters of material

fact. They were false and were made by Carpenter as well

as by Shepperd with knowledge that they were false and .

‘under circumstances which did not justify honest belief in

their truth. Such representations went far beyond the per-

missible ~~ legitimate “sales talk”.

At the time of their investments the plaintiffs were

unaware of the facts as to the inferiority of the gas pro-

duced in the discovery well. The facts disclosed by the

analysis of the gas were concealed by the defendant Car-

penter. Such concealment under the attendant facts and

circumstances, &s well as the assertion of what was false,

- eonstituted actionable fraud. -Fields v. Cornett, et al., 254

Ky. 35, 42; Kaze v. Compton, Ky., 283 S. W. 2d 204, 207.

The plaintiffs relief upon the representations made by

Carpenter and Shepperd and were induced thereby to make

and did make investments as hereinafter stated in frac- —

tional working interests in the leases, payments for which

were made ‘through Shepperd and were sent to and re-

- ceived by Carpenter. Mr. Carpenter drilled wells on cer-

tain of the leases, some of which produced gas, but all of

which gas was contaminated to substantially the same ex- _

tent as the Garrett wells.

In 1952 and 1953 the plaintiffs and others who had pur-

chased interests in the wells in question joined in a con-

tract employing Harry G. Witt to market the gas and to

distribute to the respectivé owners their proportionate

share of the net proceeds. Since 1952 tke gas has been

marketed to South Central Pettoleam Corporation which.

resold some of it to a nearby brick plant for firing brick

and has used the remainder for running engines.of oil well

pumps, repressnring and experimentation in the secondary

“

‘interest in the James Hall lease, and on December 15, 1948,

he paid $3,500 for 1/64 of 7/8 working interest in the Pete.

36

recovery of oil. In Dunn v. Tate, 268 S. W. 2d 925, the

Kentucky Court of Appeals held that by such action de-

frauded purchasers are not precluded from maintaining

' actions for damages and that the langnage of previous

decisions to the contrary was merely obiter dictum.

- By 1954 the rock pressure of the gas wells had declined

considerably and has continued to decline rapidly. On

February 9, 1958, the pressure of the James Smyth well .

was 110 pounds, the Hood Wise 70 pounds and the Elbert

Wasson 65 pounds. The leases in which plaintiffs invested

have little or no commercial value.

-It appears from the record the investments made by

the plaintiffs respectfully and the amounts received by

each of them from gas sales made by Mr. Witt are as

follows: |

DR. WAYNE R. GLOCK on December 11, 1947, paid

$2,000 for 1/16 of 7/8 working interest in the Hood Wise

lease; on March 29, 1948, he paid $2,562.50 for 1/64 of 7/8

working interest in the Hood Wise lease; on April 28, 1948,

he paid $8,000 for 1/16 of 7/8 working interest in the |

Elbert Wasson lease; on June 8, 1948, he paid $3,000 for

1/64 of 7/8 working interest in the Ida Barnes Nicholas

lease, and on August 16, 1948, he paid $1,875 for 1/128 of

7/8 working interest in the Jim Hall lease. The total

investment of this plaintiff was $17,437.50. From the

operations by Mr. Witt he received $739.69, resulting in a

pecuniary loss to him in the sum of $16,697.81.

DR. SAYMOND R. CALVERT on May 3, 1948, paid

$8,000 for 1/16 of 7/8 working interest in the Elbert

_ Wasson lease; on June 7, 1948, he paid $12,000 for 1/16 of

7/8 working interest in the Ida Barnes Nicholas lease; on

August 16, 1958," he paid $7,500 for 1/32 of 7/8 working

*This is a typographical error and should read 1948.

4

’

37

Wells lease. The total investment of. this plaintiff was

$31,000. From the operations by Mr. Witt he received

_ $940.92, resulting in 4 pecuniary loss to him in the sum

of $30,059.08.

. ROBERT E. JOHNSON on August 23, 1948, wah $1,875

for 1/128 working interest in the James Hall lease. From

the operations by Mr. Witt this plaintiff received $957.71

from a 1/128 of 7/8 working interest in the Hood Wise »

lease which was given to him by. Carpenter in exchange

for plaintiff’s interest in two oil wells which had turned

out to be.dry holes. The resultant poet loss to this

plaintiff was $1,817.29.

CLAUDE C. JOHNSON on November 8, 1948, paid

$3,500 for 1/64 of 7/8 working interest in the Pete Wells

lease. From the operations by Mr. Witt he received $117.75

from a 1/128 of 7/8 working interest in Elbert Wasson

lease which was given to him by Carpenter in exchange for

an investment in an oil lease on which the well was dry,

and from joint investments with Dr. H. F. Garton herein-

after enumerated. The resultant pecuniary loss to this

plaintiff was $3,382.25.

DEAN WILLIAMS on June 10, 1948, paid $12,000 for

1/16 of.7/8 working interest in the Ida Barnes Nicholas

lease; on August 21, 1948, he paid $3,750 for 1/64 of 7/8

working interest in the James Hall lease, and on October 29,

1948, he paid $1,500 for 1/128 of 7/8 working interest in

the Pete Wells lease. The total investment of this plain-

- tiff was $17,500. From the operations by Mr. Witt, he

received $480.32, resulting in a pecuniary loss to him in the

sum of $16,769.92. |

DR. G. A. McDOWELL, as shown by stipulation (Tr.

460), invested a: total sum of $23,250 in various of the’

leases. From the operations by Mr. Witt he received

$611.08, resulting in a pecuniary loss to him in the sum

of $22,639.92. 'rhe defendant, A. H. Carpenter, ‘sets up as

38 P - >

a defense to the claim of Dr. McDowell a document signed

by him releasing all claims against Carpenter and his agent

J. F. Shepperd growing out of the leasing of certain oil

. wells on property known as the Pilot Property in Eastern

Kentucky. This release does not relate to or bar any of

the claims asserted in this action.

DR. H. F. GARTON on December 10, 1947, paid $1, 000

for 1/32 undivided working interest in the Furnace Area,

. réferred to as the “Pres Smith farm”. On February 9, 1948,

. he paid $1,000 for 1/64 undivided working interest in 200

acres in the Furnace Area, and on October 14, 1948, he

paid $3,500 for 1/64 of 7/8 working interest in the Pete

Wells lease. The total investment of this plaintiff was

$5,500. From the operations by Mr. Witt plaintiff has re- —

‘ceived, including receipts from joint investments with

Claude C. Johnson hereinafter enumerated, $788.31, result-

ing in a pecuniary [oss to him in the sum of $4,711.69.

DR. H, F. GARTON and CLAUDE C. JOHNSON on

June 8, 1948, jointly paid $3,000 for 1/64 of 7/8 working

interest in the Ida Barnes Nicholas lease; on August 23,

1948, they paid $7,500 for 1/32 of 7/8 working interest in

the James Hall lease. The total joint investment of these

plaintiffs was $10,500. From the operations of Mr. Witt

they’ received certain sums which have been credited

against their separate. individual investments. The result-

ant pecuniary loss to these plaintiffs from their joint in-

- vestments is the sum of $10,500.

The large and apparently exorbitant prices which

- plaintiffs were induced to pay for the purchase of émall |

fractional working interests in these leases are further

indication of the fraudulent scheme of Carpenter and

Shepperd to secure large sums of money from credulous

investors. Henderson v. United States, C. A. 6, 202 F. 2d

400, 404..

39 °

As late as April, 1949, Carpenter was still representing

to investors that the gas was not being marketed because -

the field was-not fully developed. Defendants’ contention

that the actions are barred by the five-year Kentucky Stat-

utes of Limitation relating to fraud (KRS 413.120 and

413.130) seems untenable.

In addition to the claims for: damages, plaintiffs seek

to have set aside, as a transfer made without consideration

and with the intention of defrauding creditors in violation

of Kentucky Revised Statutes 378.010 and 378.020, the pur-

chase of certain shares of stock in.the South Central

Petroleum Corporation by Carpenter in the name of his

wife the defendant, Margaret L. Carpenter.

On February 17, 1948, the defendant Margaret L. Car-

peniter entered into a contract with James P. Frenzel by

which she. agreed to purchase all the latter’s interest in

the South Central Petroleum Corporation for a.considera-

tion of $18,000, of which sum $2,000 was to be paid on the

signing of the contract and the remainder at the rate of

$1,000 per month. The interest acquired by the defendant

' ‘Margaret L. Carpenter under this contract was repre-

sented by 82 shares of stock which were transferred to her

on July 16, 1949, after the finak payment on the contract.

_ The $2,000 down payment was made by A. H. Carpenter —

for his wife by check dated February 17, 1948. The check

_ bears the notation “for Margaret L. Carpenter contract |

dated 2-17-48.” Twelve of the remaining payments were

made by Carpenter by checks drawn on his personal ac-

count. Two other paymer‘s were made by Carpenter by

checks Jrawn on the account of South Central Petroleum —

Corporation and signed by him for the Corporation. These —

payments made by Carpenter total $16,000. ..argaret L.

Carpenter made two payments in the amount of $1,000

each by checks dated December 16, 1948, and January 17,

1949, drawn on “Oil Account.”-

40

The “Oil ene money was obtained by Margaret L.

Carpenter as royalties from’ an -oil lease known as the

Children’s Home Lease, which she acquired August 4, 1948,

the consideration for which lease was also paid by A. H.

~~ Carpenter, but which lease was taken in the wife’s name.

Margaret L. Carpenter testified that she had no prop-

erty when she married Carpenter “in 1941; had inherited

no property; that she had worked a few months in a

restaurant in Cincinnati in 1945 and in Texas in 1946. She,

_ further testified that she had not been paid for work in \

' the office of the South Central Petroleum eine eel \

to 1950.

Mrs. Carpenter testified that the payment for the stock

by her husband was in the nature of a loan, and that she .

had repaid him. \He also testified she had repaid him and

introduced two checks dated in January, 1949, showing

she had reimbursed him in the amount of $3,000 out of the

“Qil account.” They further testified that a check evidenc-

ing a repayment by Mrs. Carpenter in the amount of $5,000

had become iost. -

Sonia Frenzel Hoadley, widow of James F. — who

died in 1950, testified that when her late husband talked

to Carpenter about selling him his interest in South Central

Petroleum Corporation, Carpentér told her he didné want

to purchase the stock in his own name because he had too

many creditors, but that. he would discuss the matter with

ee ee ee Carpenter denied '

this conversation. —

In respect to this sieinicittii Mrs. Carpenter has not

sustained the burden of proof resting upon her.

Pursuant‘to order of September 2, 1959, the issues made

by the pleadings against the California Company were

severed from other issues of this case and will be set for

trial at a future date.

me Soe see teen

a eT ee ee ee

41

CONCLUSIONS OF LAW.

: (1) The Court has jurisdiction of the parties and the

subject matter inyolved i in these actions. Title 28 USCA

1332. .

(2) Concealment of material facts as well as misrepre-

sentation of material facts as shown herein, constituted

actionable fraud. ‘Fields v. Cornett, 254 Ky. 35, 42; Kaze v.

, Compton, 283 S. W. 2d 204, 207. sayy

-_. (3) In Sanders, Inc. v. Chesmotel Lodge, 300 S. W. 2d

239, 241, the Kentucky Court of Appeals said:

“The fundamental rule in assessing damages for

fraud is that the victim of fraud is entitled to compen-

sation for every wrong which was the natural and

proximate result of the fraud. 24 Am. Jur., Fraud and

Deceit, Section 226, page 54. In Restatement of the

' Law of .Torts, Volume 3, Section 549, page 108, the

rule is stated as follows:

“‘The measure of damages which the recipient

of a fraudulent misrepresentation is entitled to re-

cover from its maker as damages * * * is the

pecuniary ' ss which results from the falsity of the

matter misrepresented including.

““(a) the difference between the value : of the | ie

thing bought, sold or exchanged and its, purchase

price or the value’ of the thing exchanged for it, and

“*(b) pecuniary loss suffered otherwise as a con-

sequence of.the recipient’s reliance —- the truth

of the representation.’”

Under this authority, the damages whieh the plaintiffs

‘are respectfully entitled to recover from the defendant —

A. H. Carpenter is the pecuniary loss sustained by them as

the proximate result of the fraudulent concealment and mis-

representations herein set out, as hereinbove computed.

——

42

Sanders, Inc. v. Chesmotel Lodge, Ky., supra; Restatement

of the Law of Torta; Vol. 3, Sec. 549, page 108.

(4) When a transaction between persons occupying a

confidential relationship, such as the transfer of stock by

thé defendant’A. H. Carpenter to his wife, Margaret L.

Carpenter, is exposed to scrutiny, the burden is always upon

the recipient of the property to show that the conveyance

was fairly made and not tainted with an intent to accom-

plish a fraudulent purpose. As above stated, the defendant

Mafgaret L. Carpenter has not met this burden. The trans-

fer of stock to her ‘was in violation of Kentucky Revised.

‘Statutes, Secs. 378.010 and 378.020 and should be set aside.

Bolling v. Adams, Ky., 296 S. W. 2d 696. 7

(5) In each of.the above entitled cases judgment should

be entered in favor of the respective plaintiffs against A. H.

Cappenter and Margaret L. Carpenter, his wife, in con-

-formity with the views herein expressed. Each of the

judgments so entered will bear interest from the date of

entry. . a ee

. " (s) H. Church Ford,

January 6, 1960. | — Judge.

43 .

APPENDIX D

ee P >

UNITED STATES DISTRICT COURT

Eastern District of Kentucky

At Lexington.

No. 1033

Wayne’R. Glock ‘and

Blanch D. Glock, -- - - ‘=. - - Plaintiffs,

_

A.H. Carpenter,

Margaret L. Carpenter,

South Central Petroleum Corp. and

The California Company, - - - ~- - Defendants.

JUDGMENT.

_ The above styled cause, having been heard by the Court

upon the pleadings, exhibits and evidence adduced, with-

‘ out the intervention of a jury; and the Court having filed

an opinion setting out Findings Of Fact And Conclusions

Of Law, in conformity with which it is now and hereby

Ordered and Adjudged that these plaintiffs, Wayne R.

Glock and Blanch D. Glock, recover of the defendant, A. H.

Carpenter, Sixteen Thousand, Six ‘Hundred and Ninety-

Seven and 81/100 ($16,697.81) doliars, with interest thereon

at the rate of six (6%) per annum, from date of entry of

this judgment until paid; and their costs herein.

It is further hereby Ordered and Adjudged that the

transfer of eighty-two (82) shares of stock in the South

_ Central Petroleum Corp., from James F. Frenzel to Mar-

garet L. Carpenter, under a contract dated February 17,

1948, which transfers were made on’ the books of the cor-

44

poration on or about July 16, 1949, was and is a fraudulent

transfer of this stock to her in violation of Kentucky Re-

vised Statute 378.010 and 378.020; and the transfer is

hereby set aside, and it is held to be the property of A. H.

Carpenter, and it is so Ordered And Adjudged.

(s) H. Church Ford, Judge

United States District Court for

the Eastern District of Kentucky, .

. . at Lexington.

Entered: January 12, 1960. .

45

UNITED STATES DISTRICT COURT

Eastern District of Kentucky |

At Lexington

No. 1035

G. A. McDowell and — aE

Ferne McDowell, Ss. & « 2 Plaintiffs,

— we

A. H. Carpenter,

t L. ter,

- South Central Petroleum Corp. and

The California Company, - - - - Defendants.

JUDGMENT.

The above styled cause, having been heard by the Court

upon the pleadings, exhibits and evidence adduced, with-

out the intervention of a jury; and the Court having filed

an opinion setting out Findings Of Fact And Conclusions

Of Law, in conformity with which it is now and hereby

Ordered and Adjudged that these plaintiffs, G. A. Mc-

Dowell and Ferne McDowell, recover of the defendant,

A. H. Carpenter, Twenty-Two Thousand, Six Hundred and

Thirty-eight and 92/100 ($22,638.92) dollars, with interest

thereon at the rate of six (6%) per annum from date of

the entry of this judgment, until paid, and their costs

herein. <

It ‘is further hereby Ordered And Adjudged that the

transfer of eight-two (82) shares of stock in the South

_ , Central Petroleum Corp., from James F. Frenzel to Mar-

‘garet L. Carpenter, under a contract dated February 17,

1948, which transfers were made on the books of the cor-

poration on or about July 16, 1949, was and is a fraudulent

46

transfer of this stock to her in violation of Kentucky Re-

vised Statute 378.010 and 378.020; and the transfer is hereby

set aside, and it is held to be the property of A. H. Car-

penter, and it is so Ordered and Adjudged. - |

(s) H. Church Ford, Judge,

United States District Court for a

the Eastern District of Kentucky,

at Lexington.

3

Entered: January 12, 1960.

‘ , ri

.

a

47

UNITED STATES DISTRICT COURT

Eastern District of Kentucky

At Lexington

No. 1044

Claude C. Johnson, - - - - -- Plaintiff,

v.

A. H. Carpenter,

- Margaret L. Carpenter,

South Central Petroleum Corp. and

The California Company, - - -..- Defendants.

JUDGMENT.

The above styled cause, having been heard by the Court .

upon the pleadings, exhibits and evidence adduced, witb-

out the intervention of a jury; and the Court having filed

an opinion setting out Findings Of: Fact And Conclusions —

Of Law, in conformity with which it is now and hereby

Ordered and Adjudged that this plaintiff, Claude'C. John-

son, recover of the defendant, A. H. Carpenter, Three Thou-

sand, Three Hundred and eighty-two and 25/100 ($3,382.25)

dollars, with interestithereon at the rate of six (6%) per

annum, from the date of the entry of this judgment, until

paid, and his costs herein.

It is further hereby Ordered.and Adjudged that the

transfer of eighty-tWo (82) shares of’stock in the South

Central Petroléam Corp., from James F. Frenzel to Mar-

_ garet L. Carpenter, under a contract dated’ February 17, ©

. 1948, which transfers were made on the books of the cor-

. poration on or about July 16, 1949, was and is a fraudulent

transfer of this stock to her in. violation of srasunind Re- -

Vised Statute 378.010 and 378.020; and the ‘transfer is hereby

set aside, and it is held to be the property of A. H. Car-

penter, and it is so Ordered and Adjudged.

(s) H. Church Ford, Judge,

United States District Court for

the Eastern District of Kentucky

oo | ' at Lexington.

Entered: January 12, 1960. .

~—

j

&

_ | UNITED STATES DISTRICT COURT

] Eastern District of Kentucky .

At Lexington

No. 1046

Robert E. Johnson, - - - - - Plaintiff,

Vv.

A. H. Carpenter,

Margaret L. Carpenter, |

South Central Petroleum Corp. and See

The California Company, - - ~- ~- Defendants.

JUDGMENT.

é

The above styled cause, having been heard by the Court

upon the pleadings, exhibits and evidence adduced, with-

out the intervention of a jury; and the Court having filed

. an opinion setting out. Findings Of Fact And Conclusions

Of Law, in conformity. with which it is now and hereby

Ordered and Adjudged that this plaintiff, Robert E. John-

_Son, recover of the defendant, A. H. Carpenter, One Thou-

sand, eight hundred and seventeen and 29/100 ($1,817.29)

dollars, with interest thereon at ‘the rate of six (6%) per

cent per annum, from date of the entry of this judgment, ~

until paid, and uis costs herein.

It is further hereby Ordered and Adjudged that the

transfer of eighty-two (82) shares of stock in the Sduth ,

Central Petroleum Corp. from James F. Frenzel to Mar-

garet L. Carpenter, under a contract dated February 17,

1948, which transfers were made on the books of the cor-

poration on or about July 16, 1949, was and is a fraudulent

transfer of this stock to ‘her in violation of Kentucky Re-

WSS es

. Entered: January 12, 1960.

vised Statute 378.010 and 378.020; and the transfer is hereby

set aside, and it is held te be the property of A. H..Car-

penter, and it is so Ordered and Adjudged.

(s) H. Church Ford, Judge,

United States. District Court for

‘the Eastern District of Kentucky,

‘at Lexington. -

a ee

51

UNITED STATES DISTRICT COURT

; Eastern District of Kentucky

At Lexington

. No. 1048

‘WLF.Garfon, “- - + = -° - -. Plaintiff,

v. ie

A. H. Carpenter,

Margaret L. Carpenter,

South Central Petroleum Corp. and ;

The California‘Company, - - .- - Defendants.

. JUDGMENT. ;

The above styled cause, having been heard by the Court

upon the pleadings, exhibits and evidence adduced, with-

out the intervention of a jury; and the Court having filed

an opinion setting out Findings Of Fact And Conclusions

Of Law, in conformity with which it is now and hereby

Ordered and Adjudged that this plaintiff, H. §. Garton,

recover of the defendant, A. H. Carpenter, Four,Thousand,

Seven Hundred and Eleven and 69/100 ($4,711.69) dollars,

with interest thereon at the rate of six (6%) per cent per

annum, from date of entry of this judgment, until paid,

and his costs herein.

It is further Adjudged that said H. F. Garton and

said Claude C. Johnson, jointly invested $10,500.00, and it

is Ordered and Adjudged that they shall have judgment in

the said amount against the defendant, A. H. Carpenter,

for Ten Thousand, Five Hundred and no/100 ($10,500.00)

dollars, with interest thereon at the rate of six (6%) per

cent per annum, from date of the entry of this judgment,

until paid, and their..costs herein expended.

52

It is further hereby Ordered and Adjudged that the

transfer of eight-two (82) shares of stock in the South

ark Ge oe had

garet L. Carpenter, under g contract dated F\ m7,

1948, which transfers wer. made on the books of the cor-

poration on or about Jyly lu, 1949, was and is a fraudulent

‘transfer of this stock to her in violation of Kentucky Re-

vised Statute 378.010 and 378.020; and the transfer is hereby -

set aside, and it is held to be the property of A. H. Car-

penter, and it is so Ordered and Adjudged.

(s) H. Church Ford, Judge,

United States District Court. for

the Eastern District of Kentucky, ©

at Lexington.

Entered: January 12, 1960. Vee

a

53

UNITED STATES DISTRICT COURT

Eastern District of Kentucky

At Lexington

No. 1072

Dean Williams and : . ? a

Grace Williams, - -.- *- °- - Plaintiffs,

= a, |

A. H. Carpenter; *

Margaret L. Carperiter,

South Central Petroleum Corp. and

The California Company, - - - .- Defendants.

JUDGMENT.

_ ‘The above styled cause, having been heard by the Court

upon: the pleadings, exhibits and evidence adduced, ‘with-

out the intervention of a jury; and the Court having filed

an opinion setting out Findings Of Fact And Conclusions

Of Law, in conformity with which it is now and hereby

Ordered and Adjudged that, these plaintiffs, Dean Williams

and Grace Williams, recover of the defendant, A. H. Car-

penter, Sixteen Thousand, Seven Hundred and sixty-nine

and 92/100 ($16,769.92) dollars, with interest thereon at the

rate of six (6%) per cent per annum, from date of the entry

of this judgment, until paid, and their costs herein.

It is further hereby Ordered and Adjudged that the

transfer of eighty-two (82) shares of stock’in the South

Central Petroleum Corp., from James F. Frenzel to Mar-

~“garet L. Carpenter, under a contract dated February 17,

1948, which transfers were made onthe books of the cor-

poration on or about July 16, 1949, was and is 4 fraudulent

transfer of this stock to her in violation of Kentucky Re-

|

54 |

vised Statute 378.010 and 378.020; and the transfer is hereby

set aside, and it is held to be the property of A. H. -

.' penter, and it is 80 Ordered and Adjudged.

(s) H. Church Ford, Judge, .

United States District Court for

the Eastern District of Kentucky

. at Lexington.

Entered: January 12, 1960. . |

J ;

ieee 55

‘UNITED STATES DISTRICT COURT

_ Eastern, District of Kentucky ~

« At Lexington

a No. 1076

Raymond R. Calvert, - - - = - Plaintiff,

Vv.

A. H. Carpenter, _-

Margaret L. Carpenter, -

- South Central Petroleum Corp. — 7

The California Company, - - - ~- . Defendants.

JUDGMENT.

The above styled cause, having been heard by the Court

upon the pleadings, exhibits and evidence ed, with-

out the intervention of a jury; and the ae es aca

an opinion setting out: Findings Of Fact And Conclusions

Of Law, in conformity with @hich it is now and hereby

Ordered and Adjudged that 4s plaintiff, Raymond R.

Calvert, recover of the defendant, A. H. Carpenter, Thirty

Thousand and fifty-nine and 08/100 ($30,059.08) dollars,

with interest thereon at the rate of six (6%) per cent per

- annum, from date of the entry of this judgment, until paid,

and his costs herein.

_ .It is further hereby Ordered. and Kajudged - that the

transfer of eight-two (82) shares of stock in the South

Central Petroleum Corp., from James F. Frenzel to Mar-

garet L. Carpenter, under a contract dated February 17,

1948, which transfers were made on the books of the cor- :

poration on or about July,16, 1949, was and is a fraudulent

transfer of this stock to her in violation of Kentucky Re-

5 |

%

od 56

vised Statute 378.010 and 378.020; and the transfer is hereby

set aside, and it is held to be the property of A. H. Car-

penter, and it is so Ordered and Adjudged.

° (s) H. Church Ford, Judge,-

United States District Court for

the Eastern District of Kentucky,

at Lexington. . *

Entered: January 12, 1960.

-€

ee |

APPENDIX E

-

' UNITED STATES DISTRICT COURT

, Eastern District of Kentucky

At Lexingtotr ©

_ No. 1037

Richard W: Terrill and - , ae

. Frances B. Terrill, —- - <s «: «+--+ Plaintiffe,

v.

A. H. Carpenter, :

t L. Carpenter, © ~

- South Central Pet ~~ apes and

The California Com - - - - Defendants.

=

OPINION—Filed August 16, 1956.

By this action, plaintiffs seek to recover their invest-

ments, first made early in 1946 and continued from. time

* to time for several years thereafter, in certain oil and gas

* leases in Kentucky- on the ground that they were induced

~ by “fraudulent eon of the defendant oo.

. Carpenter. ©

Plaintiffs’ investments were in leases of lands located —

in Estill, Powell, Menifee, Hart and Lee Counties. Many

years previous, these counties had been subjected to con-

siderable oil and gas exploration, with some degree of .

success, by methods of recovery by natural flow or by

pumping, which-are referred to in the industry as’ primary

recovery methods. According to the testimony of Richard |

_D. White, Division pint Superintendent for Cali-

fornia Oil Company, had many years of experience in

such matters in Kentytky and elsewhere, “from fifty to

forty per cent of the oil in place is left in the ground by

° Agi. 58 es

ordinary, primary production metheds”. (Tr. Ev. p. 1055).

_ Due, no doubt, to the prospects of recovery by deeper drill-

ing and more modern methods, at about the time the plain-,

tiffs invested in this area there was a resurgence of interest

in exploration for oil and. gas in these. Kentucky counties,

. evidenced ‘bythe renewal of explorations by some of | the. e

¢ major oil companies and others engaged in. the indastry.

In 1945 the defendant A. H. Carpenter, a native of

Kentucky, who had been actively engaged in exploring for

oil in- other*states, returned to Kentucky’ and procured

leases upon a considerable. acreage in the above mentionéd

counties with a view to engaging in. further exploration |

for oil and gas. After ascertaining from authentic geo- .

‘logical reports that the geological structures underlying

his leases were favorable, in 1946 he started drilling upon

- a rather extensive scale. From time to time he sold frac-

tional working. interests in leases which he had procured

~~ and upen which he was drilling’ wells.. This seems to be a

method by which such enterprises are frequently promoted

and financed. The mere assignment of a fractional work-

ing interest in such a lease, however, does not create the

relation of partners or Hoint adveuturers but only that of

co-tenants or tenants in common who ordinarily bear no

part of the drilling or exploration’ expenses but are entitled

.' to share proportionately -in benefits derived therefrom. ~

Young v. Hill, 247 Ky. €72; Stephens v, Allen, 237 S. W.

2d 72. ;

The piaintiffs, Dr. Richard W. Terrill, ‘a physician re-

. ‘siding at Ft. Wayne, Indiana, and his wife, Mrs. Frances

“ Terrill, were among’ numerous persons who, from 1946 to.

1949, purchased fractional working interests in leases upon

which,the defendant A. H. Carpenter was engaged in ex- —

ploring for oil or gas by drilling one or more wells. They ,

alsd claim to have advanced to Carpenter various sums of

money for the purchase of leases in acreage surrounding

certain wells.

ta

“While denying all charges of fraud, the defendant A. i.

Carpenter asserts (1) that dué to the long lapse of time

' since the occurrence of the transactions alleged by plain-

tiffs, their claims are barred by applicable statutes of limi-

tation, (2) that by a contract of April 10, 1951, entered

_ into between plaintiff Richard W. Terrill! and others and .

the defendant A. H. Carpenter, the parties fully and finally

compromised and ‘settled all controversies between them

to the date thereof and released all ‘laims against each

other, and (3) that by their unequivocal acts and conduct

the: plaintiffs, with full knowledge of all attendant facts -

and .circumstances, elected to enjoy the benefits of their

investments and are, . therefore, without right to the

remedies herein sought.

We turn first to consideration of pow ini based

upon the statute of limitation. Section 413.120(12) of the

Kentucky Revised Statutes ° provides that an action for

relief or damages on the ground of fraud or mistake shall .

be conmienced within five yeats after the cause of action —

accrued, and the section 413.120(3) provides that in an

action for such relief, the-cause of ‘action shall not be

deemed to have accrued until the discovery of the fraud or

mistake: .

a It is contended on behalf of the sibiniaae that, although

the original complaint was filed July 13, 1953, since the

substituted complaint, which materially changed the relief

sought, was not filed until May 12, 1954, the latter date

should be considered as the date of the institution of the

action now under consideration ‘i in respect to the: application

of the statutes of limitation. It is made plain in the plead-

ing that the claims asserted by the amended and sub- .

stituted pleadings arose out of the conduct, transactions

and oceurrences set forth or attempted to be set forth in

the original pleading. Under Rule 15(c) of the Federal

' Rules of Civil Procedure, the amended and. substituted

a

ae ali BEAN ELAN CORTE ASO DT SRT ae eT ee a

-

e

pleadings relate back to the date of the filing of the orig-

inal pleading, July 13, 1953. as

The Court of Appeals of Kentucky has iveqpenti'« con-

- -strued the provisions of the above statutes relating to the

five year period of limitation and has uniformly held that

if, frdm the time of the allege fraud, the five year period

is allowed to elapse, the plaintiff must allege and prove

that the fraud was not only not discovered within the five -

year period, but that it could not have been discovered .

before the lapse of that period by the exercise of reasonable *

diligence. McCoy v. Areva, 295 Ky. 403, 409; Gragg v,

- > Levi, 183 Ky. 182, 208 8. W. 813, and cases cited; Forman

_ ¥. Gault, 236 Ky. 213, 32 S. W. 2d 977; House’ v. Farmers

Bank, 269.Ky. 80, 106 S. W. 2d 113. |

| It appears from the testimony introduced ‘on behalf of

- the plaintiffs that their investments in the Maloney lease ~

in Powell County and surrounding acreage, in the Logsdon

lease in Hart County and surrounding acreage, in the C.-C.

Frazier lease in Powell County, and their investments in

and specific investments in leases. embraced | in the Pilot -

area, which were the Vanderpool, the Lula Laws, the

- Spencer and the Nelson leases, and all transactions and |

occurrences herein relied upon in respect thereto, took

place in-the years 1946 and 1947. During these years the

plaintiffs frequently visited many of the areas in which

_ they had made their investments and observed the progress

and results of drilling operations. All the wells drilled

upon these leases were completed and the results known

long prior to 1948. Failure of Mr. Carpenter to satis-

factorily account for any money advanced for the purchase

of adjoining acreage, as well as his failure to make any —

assignmenis to the plaintiffs for fractional working inter-

" ests in leases to which they claim they were entitled were

_, matters well known to plaintiffs before 1948.

If any fraud was involved in any of these transactions,

the plaintiffs have failed to disclose by proof any, facts or

circumstances which precluded them from discovering ‘it

by the exercise of reasonable diligence before the ages of

the five’year period of limitation.

| Gragg v. Levi, et al., 183 Ky. 182, 186, the Court

held plaintiffs’ claim of mistake was barred for failure to

stain the burden of proof that the mistake was not dis-

covered and could not have been discovered by the exercise _

of reasonable diligence until within five years before the

_ action was commenced and said: “Statutes of limitation

are statutes of repose. Courts lend their aid to the vigilant, |

not to the slothful. -One must act while the evidence cover-

ing the transaction is fresh and may be produced.. Here

one of the parties is dead, hence important evidence is .

hushed. - There could be no Claas illustration of the reason .

‘for the rule and stotate, than furnished by the facts of this

case.” |

‘This comment is especially applicable here for it ap-

pears from the record that in practically all of the trans-

actions relied upon by the plaintiffs Joseph F. Shepperd

was the active agent.or representative of the defendant

_ Carpenter. By his death, which occurred before the in-

‘ stitution of this action, we are deprived of testimony as to

many of the attendant facts and circumstances.

‘For the reasons indiéated, we conclude that all claims

of the plaintiffs resting upon and arising out of the trans- -

actions above referred to in 1946 and 1947 are barred by |

the Kentucky five year statute of limitation. |

: Moreover, on April 10, 1951, Dr. Terrill, together with

other parties having fractional working interests in the

so-called Pilot area, which by agreement had been con-

verted into stock of the Mid-South Oil Company, entered

into an agreement with the defendant, A. H. Carpenter,

and Joseph F. Shepperd (now deceased) whereby, in con-

v2

sideration of the assignment by Carpenter and Shepperd

"of their stock in the Mid-South Oil Company to the treasury

of the company to be thereafter allocated to Dr. Terrill ©

and the other stockholders, and in further consideration

that Carpenter and Shepperd release and relinquish certain

claims which they held against the corporation, they

effected a full and final compromise and settlement of all

controversies between them and released all claims against

‘each other. The language in this agreement seems to be

clear, explicit and unmistakably applicable to the matters

herein complained -of in respect to the leases and trans-

actions. involving the Pilot area. The language indicates

& purpose to make an end of every matter arising under or

by virtue of those previous transactions. “If parties intend

to leave some things open and unsettled their intent so to do

should be made manifest.” United States v. Wm. Cramp &

Sons Co., 206 U. S..118, 128; Perkins v. Fourniquet, et al.,

55 U. 8. (14 How. ) 313, 325; St. Louis, étc. Railroad v.

United States, 267 U.S. 346, 349. The charge made on

behalf of plaintiffs that this agreement was. fraudulently

procared by Carpenter is without support in the evidence.

In March 1947 Dr. Terrill and other persons owning

shares in the leases embraced in the Pilot area joined in.

incorporating the Mid-South Oil Company and conveyed to

it their respective undivided:interests in the Pilot area in

exchange for the stock of the corporation. Dr. Terrill was

not only one of the incorporators but he was also a director

- of the corporation and is shown to have participated i in the °

~ meetings. by: proxy. At that time several of the wells.

within the Pilot area were producing oil in paying quan- .

tities and the obvious purpose of the organization,of the

_ corporation was to provide a practical means by which the

owners of the undivided interests might receive the benefits

to which they were entitled, as well as bear their pro

portionate part of the expenses of operation. Dr. Terrill

and the other shareholders received their proportionate

4 ae a ’ ‘

DRAIN ye 5 /

' shares of the. proceeds from the oil produced for. approx-

percent five years, until the corporation was dissolved and

its assets sold for a substantial price. Dr. Terrill served .

as the representative of the shareholders in making the

sale. The charges made on behalf of plaintiffs that this

corporation was a fraudulent scheme, a mere dummy to

serve the interests and purposes of.Carpenter, and had no

: legal existence seem to be without support by any proof .

introduced in the case and entirely without merit. So far

as the testimony shows, Dr. Terrill’s participation in the

organization and operation of the corporation was volun-

“tary and without duress or improper persuasion.

This brings us to the consideration of the claims of

Dr. Terrill arising from the alleged investments, similar to

those made in prior years, but alleged to have, been made

during the years 1948 and 1949; which are not affected by

the five year statutes of limitation.

Jim Hall Well.

It is claimed by Dr. Terrill that on August: 24, 1948, he

invested $1850 in :the Jim Hall well in Powell County,

which he sometimes refers to in his testimony as the Hall-

© Strange well.. He gives us no information as to the nature

or extent of the interest he claims to have so acquired and

|. admits that he received no assignment or.conveyance for

.any interest therein. He produces a check, dated August

24, 1948, drawn by him on the Lincoln National Bank and ‘

Trust Company of. Ft. Wayne, Indiana, for the sum of 4

$1850 payable “To the order of Mr. A. H. Carpenter”

(Plaintiffs’ Exhibit 44). Dr. Terrill testified that he mailed

this check to Mr. Carpenter. Mr. Carpenter denies that he

received the check or any amount of money on account of it.

‘The check, though: payable to his order, bears no endorse- »

ment of Mr. Carpenter or any other payee. It merely bears _

‘a perforation “Paid 8 24 48 71-27”. This was the same:

64

se

date the check was drawn. Nothing is introduced to show

that this check ‘was ever charged to the account of Dr.

Terrill by the bank upon which it was drawn. This vague

, evidence i is insufficient to support the claim that Dr. Terrill

_ invested in the Jim Hall well. ;

f Shell Palmer Lease.

The testimony of Dr. Terrill as to his investment in the

. Shell. Palmer lease in Menifee County ‘and as to the repre-

sentations made to him i in aes a anid by Mr. Carpenter

is as follows: a

~ &Q, 464. Dr. Terrill, did you make an investment

in Menifee County, Kentucky?

'. & rae

Q. 465. On what lease?

‘A. On the Shell Palmer lease. — “ie

Q. 466. Did you have any discussion with Mr.

Carpenter before you invested in that lease?

A: I did. )

Q. What did he say to you?

A. Mr. Carpenter said that he had wells in

The Children’s Home area and that they were very

productive wells, that a number of people had tried to

acquire the Shell Palmer lease which was supposedly

_ adjoining, but Mr. Palmer refused to lease that ground .

to anybody. Mr. Carpenter said that he was a very

unusual character and very difficult to deal with and

that he had spent a lot of time and effort in getting

what little good will it would be possible to get from |

Mr. Palmer, but even he could not lease this land as

long as Mr. Palmer was Alive, but, if anybody was

going to get it, he was going to get it. Mr. Carpenter

said he finally ac:juired it when Mr. Shell.Palmer got

drunk and fell down in the hog pen and the —_ ate

him up. ”

i Oe PH,

65.

A 5/32 undivided working interest in this Shell Palmer

lease, which had previously been assigned by A. H. Car-

“penter to J. F. Shepperd, was assigned to Richard W. or

Frances Terrill by J. F. Shepperd on February 20, 1949. -

The four wells drilled by Mr. Carpenter on this lease failed

. to produce either oil or gas in paying quantities and they. ~

were abandoned.

Lee Cointy Lowe.

. It satisfactorily appears from the record that on the

20th day of June, 1949, J. F. Shepperd assigned to R. W.

or Frances Terrill 8/64 working intvrest in 39 leases cover-

ing a large body of land located in Northeast Lee County,

Kentucky (Plaintiffs’ Exhibit 62). This property had

previously been conveyed to. J. F; Shepperd by the defend-

ant A. H. Carpenter. In respect to the representations

made to him by Mr. Carpenter relative to this transaction,

Dr. Terrill testified as follows:

“Q. 452. What did Mr. Carpenter say to ~*~ about

this acreage in Lee County?

A. Mr. Carpenter told me that there was a

large plot of acreage in Lee County, between 2500 and

3000 acres, that had excellent geology, that the geology

had been worked out by the Valownaity of Kentucky

_...Seo}ogical department, tliat the leases were expensive

and called for a lot of money, that.there had never

been any drilling on this plot of land and there was a

pure wildcat, but the geological yeport was so ex-

cellent that he recommended very highly my investing

in this property and he recommended the drilling of

two wells.

Q. 453. Did you invest in that property?

A. I did” (Tr. Ev., pp. 196-197).

Under the law of Kentucky, the established doctrine in

respect to proof éssential to establish actionable fraud is

66 ‘ fee by

that it must appear from the proof that the alleged mis- —

representations were in respect to matters of material fact

as distinguished from mere opinion or a promise for the

future; were relied upon by the person whose action was

intended to be influenced; and were made with knowledge

of their falsity or under circumstances which did not |

‘justify belief in their truth. Livermore v. Middlesborough..

Town Lands Co., 106 Ky. 140, 163;.Dolle v. Melrose Prop-

. erties, Inc., 252 Ky. 482; Baxter v. Davis, 252 Ky. 525.

In Engemagn v. Allen; Trustee, 201 Ky. 483, 484, the

Kentucky Court of Appeals observed “Nothing is more un-

certain than the production of oi! wells,-and any repre-

sentation as to future production is a mere expression of

opinion as to expectations and probabilities, and will not

. constitute fraud, even though it turn out to be untrue.”

There ‘is nothing to show that Dr. Terrill was a novice.

in respect to such transactions. In response to the question

as. to whether from the years 1946 to 1950 he had other

_ similar transactions in the oil business, he admitted that,

while he did not remember the dates, he had purchased

fractional working interests in other oil fields with which

the defendant Carpenter had no connection (Tr. Ev., Vol. 6,

_ pp. 2036-2039). |

Testing the representations inant. to have been made

by Mr. Carpenter in respect to the Shell Palmer lease and

Lee County leases by the rule above stated, we are of the

opinion that they do not measure up to the standard of

actionable fraud and therefore constitute no basis for the

claims herein asserted. It is not shown that any of the

facts alleged to have been misrepresented were in respect |

to matters of material fact or that they were either made

with knowledge of their falsity or under circumstances

which did not justify belief in their trath. ;

The evidence is insufficient to support the claim of Dr.

Terrill that he invested in the gas wells known as the .

: 67

- James Smyth well, the Hood Wise well, the Elbert Wasson

well «ad the Ida Barnes Nicholas well, thus rendering it

unnecessary to here discuss the controversy. disclosed in

the record in respect to the failure of Mr. Carpenter to dis- .

- lose to investors in those wells the facts as to the quality

_. ‘of gas prodneed or to the probable size of the field. It

appears that such interests as Dr. Terrill acquired in gas

wells were conveyed to him by Mr. Carpenter without con-

sideration. Dr. Terrill joined with other persons inter-

ested in the gas wells in employing Harry Witt, an engineer

residing at Irvine, Ky., to promote the sale of gas produced

from these wells. From them, Dr. Terrill and other persons

holding interests therein have ever since received the pro- .

ceeds of gas sold and so far as disclosed by the record are

still receiving such proceeds.

It appears that the unequivocal acts and conduct of

the plaintiffs, by participation for many years in the bene-

fits derived from the producing oil wells, as “well as in the

benefits derived from the producing gas wells, with knowl-

edge of the attendant facts and circumstances involved in

the transactions, constituted such‘condonement of the

alleged fraud, if any existed, as to preclude the remedies

which they now: belatedly seek. Mackenzie v. Eschmann’s

Executors, 174 Ky. 450, 454; Cox v. Higgins, 223 Ky. 510.

Apart from the foregoing considérations, however, view-

ing the overall record in respect to the various charges of

fraud upon which the plaintiffs rely, we are of the opinion

that they have failed to sustain the burden of proving their

"accusations by clear and convincing evidence for, under

‘the law of Kentucky, it is made clear that““fraud will not

_ be presumed, and one who charges fraud assumes thé

burden of sustaining his accusation by clear and convincing

evidence sufficient to overcome the-legel presumption of

innocence and honesty. Fraud may be proved by positive

evidence or circumstances and inferences fairly and rea-

tT?

sonably deducible therefrom, but it may not be proved by

mere inferences, conjecture, or suspicion, and where the

_ proven facts or circumstances merely show inferences, con-

jecture, of. suspicion, or such as to leave reasonably prudent

- minds in doubt, it must be regarded as a failure of proof

to establish fraud.” Goerter v. Shapiro, 254 Ky. 701, 704;

Rice v. Hord, 252 Ky. 469, 472; Dennis v. an et al.,

240 Ky..727, 736.

The foregving conclusions render it unnecessary to con-

sider or determine the question presented as to whether the

purchase and transfer of certain stock in the South Central

Petroleum Corporation. i in the name of Margaret L. Car-

penter was in violation of Kentucky Revised Statutes, Sec-

tions 378.010-378.020.

Judgment will be entered i in conformity with the views

herein expressed.

: (s) H. Church Ford,

August 16, 1956. Judge.’

TEE COPY

No} 8Y

a

a’

“ .

~A HL CarpPeENTER,

IN THE :

Supreme Court of the United States

October Term.

ETAL »

* Petitioners

\S-

-

Wayse Ro Gitocx, ET AL

Respondents

\. LE. Canrenter, ET AL

t Petitioners:

e Vi: ;

(. A. MeDoweEn,

ET AL

Respondents

\ HL. Carpenter, ET AL

; Petitioners

\S:

Ciatpe © . JouNsSON

Re sponde nt

ACHE Canrenrer, ET AL

- . Petitioners,

\S:

Ronerr EF JOHNSON

Rt spondent

RESPONSE

“fl I

1960 ‘ &

A. I. Cawishen, ET AL

Petitioners

VS:

GAKTON .

Respondent

A. H.C AKPENTER; “ET AL

Petitione rs

VS:

Dan Wit iaMs, E T AL

Respondents

A. HL. Carpenter, ET AL

» Petitioners

VS: | .

ROR. Catvent., ET AL

-% Respondents

_~

«

TO PE: TITION.

FOR WRIT OF CE RTIOR: Atl

Lexington,

Troy D. Savacre

Frankfort, Kentucky

Herpert PD. Stepp.

Wiis H. McCann

Kentucky

MAY 5

obs JAMES R BROYHING. C

= ri

Attorneys For Respondents

hag!

Clerk

‘

INDEX

I. PETITIONERS FAILED TO BRING THEMSELVES

UNDER,U.S.S.Ct. 0 ERE ies 1

A. STATEMENT OF RULE 19b .% 1

B. STATEMENT |OF ISSUES INVOLVED ............... 2

. C. THE DISTRICT COURT'S RULING APPLIED

THE APPLICABLE LAW OF THE STATE OF

KENTUCKY: TO ALL OF THE ABOVE ISSUES a e

| EAN ae Cao I Ae 3

ON hea sets ere en eee, 3

RAE riccacehntcaitnat ceria cece ek ea 4

7 SINE UIE coinovccaispnspbicspiattclannansiaivacensncsniut theeisnaaseceueacesaais 5

) Mssue ae sssseeeeeeiocnee oe ‘cmeies adieimeenibsnaaneaetieian 6

ea ee a 7

D. THE R. W. TERRILL VS: A. H. CARPENTER

CASE HAS NO. APPLICATION TO THE

PRESENT CASE ........ Ge Gah eeaeeencia eet Hircadove 8

CONCLUSION ......... HA Gael ela blat ore Coen a

(* my

CITATIONS

CASES:

Dunn v. Tate, Ky., 268 SW 2d ESN er ore ee ".

.

Dycus Vv. Dycus, 295 Ky. 847, 175 SW 2d 997 ...

Hampton v. Suter, Ky., 330 SW 2d 402 0...

~ Ky. Electric Development Co. v. Head, Ky., 68 SW 2d 1

McCoy v. Arena, 295 Ky. 403,.174 SW 24-726

McCulloch v. Scott, 13 B.“Monroe, Ky. 172 :

, Sanders v. Chesmotel Ledge, K .. 300 SW 2d 239 ~

. Shilling v. McGraw, 298 Ky. 783, 184 SW 2d 97

“Terrill v. Carpenter, 143 F. Supp. 747, 249 F.2d 142

Webb v. Verkamp Corporation: Kv., 254 SW 2d 77

“—

STATUTES:

.Kentucky Revised Statutes, - -

Sections 413.120 and 413.130

MISCELLANEOUS:

24 Am. Jur. 36, Sec. 210.

24 Am. Jur. 40, Sec. 213... a3 SE

“PA Aite, Yr, 48y S00. BMG cee ees ee

24 Am. Jur., Sections 227, 298. pp. 55-60.

A Restatement Of The Law Of Torts, Vol. Ill. p. AD

U.S.C.A., Rule. 19 .. ASR Rs wei A

.

In THE 2

Supreme Court of the Hnited States

October Term, 1960

A. H. Carpenter, EF AL ¥ H. CARPENTER, ET AL

’ Petitioners Petitioners

VS: VS: 4

Wayne R. Giock, ET AL .-_H. F. Garton

Respondents 3 Respondent

A..H. CARPENTER, ET’ AL ‘A. H. Carpenter, ET AL

Petitioners Petitioners

VS: VS: .

_G. A. McDoweE LL, ET. AL Dean WiiuiaMs, ET AL

. Respondents e Respondent

A. H. Carpenter, ET AL A. H. CARPENTER, ETAL |

Petitioners _ Petitioners

VS: Vs:

CLaupe C. JOHNSON . R. R. Catvert, ET AL

: Respondents Respondent

ACH. CARPENTER, ET AL | eg

Petitioners

VS:

Rosert E. JOHNSON

Respondents

RESPONSE TO PETITION

FOR WRIT OF CERTIORARI -

L

PETITIONERS FAILED TO BRING THEMSELVES

UNDER U.S.S.Ct. RULE 19b

The petitioners have not brought themselves under Rule 19b

of this Court.

a

| STATEMENT OF RULE 19h ,

Rule 19b says that this Court will entertain arid grant a writ

va-

2

of certiorari where a Court of Appeals has rendered a decision

or decided an important state question in a way in conflict with

applicable state law. |

All the other reasons mentioned in 19b for granting a petition

for writ of certiorari have no application to the present case.

B.

STATEMENT OF ISSUES INVOLVED

The District Court for the Eastern District of Kentucky in no

way, failed or decided any issue in conflict with applicable law

for the State of Kentucky, either statutory or case law.

The questions presented by the pleadings in the District

Court were as follows:

~ (1) Fraud and deceit in the inducement of the sale of frac-

tional working interest in gas leases;

~ (2) The fradulent transfer of one-fourth of the stock in dis

South Central Corporation to Margaret bate wife of

petitioner A. H. Carpenter;

(3) Statute of ‘imitations;

(4) Measure of damages;

(5). Amount of damages.’

. Another question was raised by the present petitioner in his

brief to the U.S. Circuit Court at Cincinnati, to wit: The actions

_ involved in the District Court were really rescission actions

instead of common law actions for damages.

Another question or theory was raised by present petitioners’

petition for a rehearing in the U.S. Circuit Court at Cincinnati

_as follows:

——————— Ee

8

That the District Court ruling was a taking of property with-

out due process of law.

Cc.

THE DISTRICT COURT’S RULING APPLIED

THE APPLICABLE LAW OF THE STATE OF

_ KENTUCKY TO ALL OF THE ABOVE ISSUES.

ISSUE 1 |

Question (1) above was not carried forward into this petition

for a writ of certiorari by any arguments in support thereof,

except as to the Hall and Wells leases (VIII, p. 21, petition),

where the petitioner says there was no proof of any representa- .

tion concerning these wells. This is simply not so. The record

shows that the “Receipt and Agreement” given for the money .

paid for the interest in these leases recited that these two leases

were in the “Furnace Area” (App. “= IE, pp. 366a, 424a, 471a,

509a and 508a).

All representations concerning ‘the leases in the “Furnace’

Area” applies to the Hall and Wells leases, as well as the Smyth,

Wise, Wasson, Burnes and other leases sold as gas leases, al-

though the latter were closer to the site of an old stone furnace,

_ from which the area took its name.

ISSUE 2 _

This issue is not mentioned in the petition for writ, and may

be disregarded.

al

ISSUE 3

The ruling of the District Court on question No. (3) above

follows the Kentucky statute and cases —— to the statute

of limitations in Kentucky.

The Court applied the law on limitations as set out in KRS

413.120 and KRS 413-.130. The wording of both statutes is set

4

out i in the petition for writ of certiorari at page 7. The Kentucky

» cases interpreting this section, insofar as applicable to the facts.

of the instant case, are: Shilliiig v. McGraw, 298 Ky. 783, 184 |

SW 2d 97; Dycus v. Dycus, 295 Ky. 847, 175 SW. 2d 997; Ne-

Coy v. Sammm, SD By. 403, 174 SW 2d 726.

A misstatement of the evidence is made in the petition te |

rehearing at page 11 as follows:

. after respondents learned of the true wud of the

- which was in December 1948 and the first days of

January 1990

This is an incorrect statement of the evidence. The evidence

is that the plaintiffs below, R. R. Calvert, did not discover or

learn of the true analysis of the gas until about the month of

March or April, 1949 (App. V. II, p.434a), and Dean Williams

not until the year 1950 (V. II, p. 609a), which of course brings

all of these plaintiffs well within the five-year period of limita-

tions for the bringing of fraud actions from the date of dis-

covery of the fraud, and the District Court so ruled.

“ISSUE 4

The Kentucky law was followed in deciding question No. (4)

above set out regarding the measure of damages to be applied

to actions in deceit for Gammages.

The Court followed the rule set out in the case of Sanders v.

Chesmotel Lodge, Ky., 300 SW 2d 239. See page 41 of petition

for writ of certiorari.

In this case the Court of Appeals for the State of Kentucky

adopted the rule for measuring damages in actions of this

kind as set out in A Restatement Of The Law Of Torts, V. III,

page 549, and this is unquestionably the law. of ‘the State of

PNG

Kentucky.

As can be seen by reading this rule as enunciated in the

Sanders v. Chesmotel Lodge case, the “out-of-pocket-loss” rule

is adopted in the State of Kentucky for measuring damages in

fraud cases. This, simply stated, is the difference between what

is paid and its value, or thé difference between what was paid

and what-was gotten, and of necessity requires a pleading aud

proof of the purchase price of the thing bought.

‘The petitioner argues in points IX, X, and XI that Pa Court

misapplied the law of the State of Kentucky and makes argu-

ments based upon. what is known as the “benefit of the bar-

gain” rule,

This is assuming a’ wholly fallacious, original premise and

therefore the conclusions must, of necessity, be wrong. The

“benefit of the bargain” rule is not followed in the State of Ken-

tucky. This rule, simply stated, is as follows: The difference

between what the purchaser got and what it would have been

- worth had the representations been true. Under this rule the °

question of the purchase price need not be pled or proven. For

a discussion of the two rules for measuring damages see 24 Am.

Jur., Fraud and Deceit, Sec. 227 and Sec. 228, at pages 55-60. .

ISSUE 5

oe No. (5) is not argued before this Court, that is, as —

to the amount of damages, except insofar as the petitioners

argue that the Court of Appeals applied the wrong measure

answered above (Issue 4), and possibly except insofar as.they

argue that the.Court did not allow the petitioner a sufficient

' amount as the value of the property received.

The District Court held that the proof showed that the leases

were of little or no commercial value (p. 36 of petition for writ

of certiorari), 7 District Court ruled as follows:

6

“By 1954 the rock pressure of the gas wells had declined

- considerably and has continued to decline rapidly. On

_ February 9, 1958, the pressure of the James Smyth well

-_ was 110 pounds, the Hood Wise 70 pounds and the Elbert

Wasson 65 pounds. The leases in which plaintiffs invested

have little or no commercial value.”

As stated in the petitioner's petition (p. 26), the original rock _

' pressure of these wells was 772 pounds, and there is ample evi-

dence in the record to support the Court's finding, as there are

three expert witnesses who testified that the wells were value-

less (App. V. III, p. 1082a; V. VI, pp. 1088a, 1098a ). Further-

more, there is evidence that the income had ceased.

ISSUE 6

On question No. (7) raised by the appellants in their brief

to the U.S. Circuit Court, but which had not been raised in the

pleadings or trial before the District Court, the District Court

properly applied the Kentucky law. The gist of the argument —

made hy the present petitioners in the U.S. Circuit Court was

that even though the actions had been styled, tried and ruled

upon by the District Court as common law actions for damages

- for deceit, they were in reality actions for rescissions as the

complaints asked for the exact amount of the purchase price as

damages and it made no difference what the compuningats

called the actions.

In Kentucky the general law is followed as pertains to actions:

for rescission and actions for damages, and was so applied by

the District Court in these cases.

. The law in Kentucky applicable to waiver of rights of actions

for fraud by the ratification of a contract after knowledge of

fraud is as follows: |

(1) It is that the ratification of such a contract, after ac-

7

ae aoe ae

quiring knowledge of the fraud by accepting benefits of the

contract, treating as in force, etc., waives.all rights to an equit-

able action for rescission of tke contract and recovery of the

_ purchase money. 24 Am. Jur. 36, Sec. 210; McCulloch v.

. Scott, 13 B. Monroe, Ky.'172; Webb v. Verkamp Corporation,

Ky., 254 SW 2d 717. The reason for this rule being that one can-

not treat a contract as in force and at the same time seek to res-'

cind same. . |

‘(2) It is likewise the Kentucky law that ratification after

discovery of fraud does not waive the right to bring a common

law action for damages for the loss occasioned by the fraud.

24 Am. Jur. 40, Sec. 213; Dunn v. Tate, Ky., 268 SW 2d 925;

Kentucky Electric Development Co. v. Head, Ky., 68 SW 2.1.

(3) This latter rule is subject to an exception that one can-

not make a new contract, alter or modify the original fraudu-

lent contract after acquiring knowledge of the fraud without

waiving the fraud and losing the right to sue in either equity

for rescission or common law for damages. 24 Am. Jur. 42, Sec.

214; Hampton v. Suter, Ky., 330 SW 2d 402.

A point is attempted by petitioner that the Hampton v.

Suter, supra, case overrules the case of Dunn v. Tate, supra.

However, this is untenable because the Court in the Suter

case specifically points out that it does not overrule the Dunn

case as follows:

- “Having once determined such an election he could not

thereafter be relieved of the obligations placed upon him

by the terms of the contract, although such an election

does not ordinarily deprive one of a right to claim damages.

Dunn v. Tate, Ky., 268 SW 2d 925.” (Emphasis added)

ISSUE 7

The theory or issue raised by the present petitioners in their

3

petition for a rehearing in the U.S. Circuit Court, i. e., that the

ruling of the District Court was a taking of the property of the

petitioners without due process of law, is hard to understand.

Due process of law, as we understand it, is a ruling by a

judicial tribunal who has jurisdiction of the subject matter of .

the parties involved, and can in no sense be regarded as the

taking of property without due process of law. Due process of

law means a judicial determination, which was exactly what

happened in the instant case, if there was any taking at all. The

authorities cited by the petitioners have nothing to do with the

issue presented as they are merely statements that property

cannot be taken without due process of law, which is a court

action. —

Assuming that the Court did err in failing to allow the pre-

sent petitioners some setoff for the alleged value of the property

which was received by the purchasers, it would be a mere error _

in the Court’s judgment which would be appealable and in no

sense could be construed as the toting of ry without due

process of law.

. THE R. W. TERRILL VS: A. H. CARPENTER

— HAS NO APPLICATION TO THE PRESENT

CASE

An argument is made at page 19 of the petition for writ of

certiorari that the District Court was controlled by the case of

R. W. Terrill v. A. H. Carpenter, et al, which was appealed to

the U.S. District Court and affirmed that the ruling in the Ter-

rill case on the question of the signatures of the plaintiffs in the

present cases, Dr. G. A. McDowell and Dr. H. F. Garton, is res

adiudicata, or at least binding on both the [istrict Court and

the Circuit Court:in these cases. A copy of the District Court's

ruling in the Terrill case is included in the appendix to the

Ve nses oe

Separate and distinct areas, one invo

é 9.

present petition (pp. 57-68), and a cursory reading of the.

District Court's ruling at page 62 of the petition shows that the

release signed by-Dr. Terrill, Dr. McDowell and others was a

release of the claims involved in the operations in the “Pilot

Area,” while the litigation in the present cases involves the

transactions ip and around the “Furnace Area.” Two wholly

Iving oil leases and: the -

@

other gas leases.

We do not see the effect of the petitioner's argument for

both the Terrill case and the present cases were decided by the .

same District Court and the same U.S. Circuit Court, and if

the decision in the latter cases are contra to the decision in

the Terrill case it can mean only one thing: That the Court is

overruling its former opinions. .

However, the opinion of the District Court in these seven

cases is not controlled in any way. by the opinion in the Terrill

case because the Terrill case involves alleged fraud in the in- -

ducement of the purchase of fractional interest in producing oil:

leases.-It involves separate and diftinct plaintiffs and separate

and distinct ground of fraud. The question of fraud in the in-

diitement of the purchase of fractional working interest in*gas

leases in the “Furnace Area” was specifically excluded from the

opinion in the Terrill case at page 66 of the petition as follows:

“The evidence is insufficient to support th® claim of Dr.

Terrill that he invested in the gas wells known as-the

James Smyth well, the Hood Wise well, the Elbert Wasson

well and the Ida Barnes Nicholas well, thus rendering it

unnecessary to here discuss the controversy disclosed in

the record in respect to the failure of Mr. Carpenter to dis-

close to investors in those wells the facts as to the quality

of gas produced or to the probable size of the field.”

/ ‘ ; . ries

10 a :

The i: in ‘ai Terrill case as iarteinet to the statute of \ |

limitations has nothing to do with the ssue on the statute of

limitations in the present cases because. the ruling in the Terrill

casé was that the statute of limitations had run against money

fraudulently parted with in the year 1947, which made the |

_ filing of the Terrill action in July of 1953 well beyond the five-

~ year limitation. The fact that in the year of 1949 Dr. Terrill in-’

vested money in other dil leases was not ruled out on the

‘ground that limitations had run against Dr. Terrill but‘on the |

ground that plaintiffs had failed to establish fraud in the’ sid

nal inducements in ss ai to these investments.

———— ee

-

CONCLUSION

_ The petition for a writ of certiorari should be denied.

Respectfully submitted,

Hersert D. SLEDpD

nia, Wittiam H. McCann Dy

ad >

Attorneys For Respondents

; _. \” CERTIFICATE

I, Astor Hogg, do hereby certify. that I am a member of the

United States Supreme Court Bar, having been admitted ac-

_ cording to law, and further certify that Troy D. Savage, whose

name appears on the foregoing response to petition for writ of

_ certiorari, is a member of the Bar of. the Commonwealth of

— and in good standing, &

Astor Hocc

SL

7

Subscribed and sworn to before me this .....:........ day of May,

1961, by Astor Hogg.

es

My commission expires:

February 17, 1964. _ Lucy Pratr Ropman, Notary Public

Kentucky State at Large

i

med?

No. 8 89

TOPY —

_ Ir THE

October: Term, 1960

umce-supreme Lourt, U.S.

PILED

MAY 10 1961

| JAMES R. BROWNING, Clerk

.

SUPREME COURT OF THE UNITED STATES

ry a

4A, H. CARPENTER, ET ‘lie : PETITIONERS,

aV. ° |

‘GWAYNE R, GLOCK, ET ALsy RESPONDENTS.

A. H, CARPENTER, ET AL., PETITIONERS,

. A. MCDOWELL; ET AL., RESPONDENTS, .

. H. CARPENTER, ET AL., PETITIOWERS, |

'}. H. CARPENTER, ET AL., »

-RROBERT E. JOHNSOM, RESPONDENT.

. He CARPENTER, ET Ales PETITIONERS, -

bh. FP. CARTON, RESPONDENT. |

MH CARPENTER, ET AL., PETITIONERS,

_ |PEAN WILLIAMS, ET AL, RESPONDENTS.

. H. CARPENTER, ET AL., PETITIONERS,

?. Re CALVERT, ET AL., _RESFONDEYTS.

F

| _- REPLY TO THE RESPONSE

THOMAS D, SHUMATE,

SHUMATE & SHUMATE,

Irvine, Kentucky

M.A. ROWADY,

on Reneucky

2

REPLY TO THE RESPONSE

MAY IT PLEASE THE COURT:.

In regard to the statement in 6ur

petition on page ll-and the response

on page 4 in regard to the Statute of

Limitations as applied to Dr, R. R. Cal-

vert and Dean Williams that they knew

of the true analysis of the gas over

five years prior to the institution of

their actions, Dr. R. R. Calvert testi-

fied that his brother, Dale Preston Cal-

‘vert, am attorney, was investigating the

matter for him (Appellants" Appendix,

Vol. II, 434a), and Dale Preston Par

Calvert testified that he learned of the

true analysis of the gas in January 1949

— Appendix, Vol.. II, 632- |

Ade 7 ‘ 1 :

' As to Dean Williams, it appears

that Dale Preston Calvert was investi-

geting for the entire Lafayette group,

and Dean Williams was one of the group.

In other words, Dale Preston Calvert

was their agent looking after their .

investments, and notice to him was

- notice to the principals. Neither Dr.

_ Calvert nor Mr. Williams testified as to.

Ly

;

-

u

ied

;

=

:

4

4

“

4

3

;

*2

AA

3

any diligence to ascertain the true

facts: except through Dale Preston Cal-

vert. ‘i

Respectfully submitted,

THOMAS D. SHUMATE,

‘SHUMATE & SHUMATE,

Irvine, Kentucky

M. A. ROWADY,

Winchester, Kentucky.

Attorneys for: Petitioners.