Sparks Bros. Drilling Co. v. Texas Moran Exploration Co.

OPALA, Chief Justice,

with whom HARGRAVE, Justice, joins, dissenting.

The court concludes the evidence is insufficient to support the trial court’s money judgment against a nonoperating working interest owner held jointly liable qua mining partner for the unpaid services and materials provided to the well operator. The court’s opinion reverses the nisi prius decision and remands the cause for a determination of the liens’ priority order.

*955I must recede from the court’s pronouncement which is grounded solely on the perceived lack of evidence to meet the third prong of the then-effective common-law test for determining mining partnership status1—i.e., the existence of cooperation in the drilling of the well. In my view, competent evidence clearly establishes every element of the mining partnership test. I would affirm the judgment.

I

THE ANATOMY OF LITIGATION

Texas Moran Exploration Company [Texas Moran] owned a recorded twenty-five percent working interest in the well in suit, known as the 1-29 South Otter Creek Prospect well [1-29]. This company was owned by Patrick Moran, an attorney who, at the time this suit arose, had invested in fourteen to sixteen oil and gas drilling ventures. At the recommendation of its hired consultant, J. Spencer Collins [Collins], Texas Moran purchased an interest in the 1-29 well, which was operated by PinTex Petroleum Company [operator or PinTex], Collins had also suggested an investment in another PinTex-operated well, the 2-11 West Linscott well [Linscott]. Texas Moran initially invested in the Linscott well and later in the 1-29 well, signing for both transactions essentially the same standard operating agreement used throughout the industry. The agreement recited that the parties’ relationship was to be considered a partnership for tax purposes only. It specifically disclaimed any intent to create a mining partnership or to impose joint liability on the individual investors. The venture’s profits and losses were not to be shared by the investors.2

Collins’ services to Texas Moran officially ended when the company invested in the 1-29 well; his consulting fee was paid in November 1985. Two months later Collins became concerned about the PinTex investments he had recommended and, at his own expense, paid a visit on PinTex personnel at their Boulder, Colorado office. PinTex’s president believed that Collins was representing Texas Moran during the Boulder trip.3 Later Collins was asked to represent Texas Moran at two investors’ meetings held to discuss problems which had developed on the Linscott well. According to his testimony, Collins maintained almost daily contact with the operating personnel on the 1-29 well’s drilling progress. When Collins was given copies of the electric logs on the well—information not provided to any of the other investors—he marked the logs and forwarded them to Texas Moran. The 1-29 well operator testified that he believed Collins was representing Texas Moran when he complied with Collins’ request to take a core sample—a decision that involved shutting down the drilling on the well.4

*956Before the 1-29 well’s completion, Texas Moran became aware that liens for nonpayment of services and supplies were being filed on the producing Linscott well. Texas Moran took over the operation of that well and paid off the existing liens when no other investor would assume that responsibility. Pat Moran then sent to the PinTex operator a letter (a) expressing his concern about liens on the Linscott well and (b) stating that he (Moran) would “have to pay off the liens that will inevitably come on South Otter” (the 1-29 well) “due to your shortfalls.”

The 1-29 well was never productive. When its debts were not paid by the operator, several oil well supply companies perfected their liens. Because the leasehold estate had little value, the Sparks Brothers Drilling Company [drilling company] brought a lawsuit against the operator as well as Texas Moran and the other non-operating working interest owners (a) to recover a money judgment for unpaid services 5 and (b) to have the priority of its lien established vis-a-vis the other lien claimants. The J.W. Pump & Supply Co. [supply company] cross-claimed against the same defendants for the value of the casing furnished. After a jury-waived bench trial money judgment was given to both the plaintiff-drilling company and the defendant/cross-claimant supply company. Applying the tripartite test of Jenkins v. Pappas6 for establishing mining partnership status, the trial court found Texas Moran jointly liable with the well operator, qua mining partner, for unpaid supplies and services at the well site.

II

STANDARD OF REVIEW

When a jury is waived in a common-law case, the trial judge’s determination of facts must be given the same force as the verdict of a well-instructed jury. If any competent evidence supports the nisi pri-us judgment, it must be affirmed on review.7

III

MINING PARTNERSHIP STATUS FOUND FROM THE CONDUCT ' OF THE PARTIES

All the parties litigant appear to rely on the terms of the operating agreement between Texas Moran and the operator as solely determinative of Texas Moran’s non-liability as PinTex’s mining partner.

Whether a party stands vis-a-vis another in a partnership relation depends on its status, which at common law is found from the surrounding facts and from the interaction of the parties rather than solely from the contract.8 In case of a discrepancy between facts and contractual provisions, facts control over any contrary provi*957sions in the parties’ agreement.9 In order to protect third party creditors, mining partnership status is often imposed by law in the absence of a contract or in direct opposition to contractual disavowals of partner relationship.10 Regardless of the parties’ intent, if by their conduct vis-a-vis one another they have in point of law engaged in a partnership, they may neither deny the relationship nor the liability to third parties that arises from it.11

Evidence of Texas Moran’s conduct, beyond the requirements of or in opposition to disclaimers in the agreement, was the basis of the nisi prius ruling that Texas Moran became a mining partner. The liability to third party lien claimants attached from that finding.12 While the lien claimants may not have detrimentally relied on Texas Moran’s status as a partner when they furnished supplies and services for the well, this fact does not affect their right to recover against one who by its conduct becomes in law a partner in the venture.13

IV

THE THREE-PRONG TEST FOR DETERMINING MINING PARTNERSHIP STATUS

The three-prong test for determining mining partnership, first expressed in Edwards v. Hardwick14 and more recently in Jenkins v. Pappas,15 requires the presence of three elements: (1) a joint ownership interest in the property; (2) an express or implied agreement to share in the profits and losses of the venture and (3) actions or conduct showing a joint operation or cooperation in the venture.16 None of the parties disagrees that Texas Moran has an ownership interest in the leasehold estate, thus satisfying the first prong of the test.

A

THE EVIDENCE THAT SATISFIES PRONG TWO: THE EXPRESS OR IMPLIED AGREEMENT TO SHARE IN PROFITS AND LOSSES

At issue here is the existence of any conduct by Texas Moran and the operator tending to show an agreement to allocate the losses that might arise from the venture.17 The trial court found there was an “express or implied agreement between PinTex and Texas Moran to share profits and losses.” Texas Moran wrote a letter to the operator indicating that the company would be advancing money, far in excess of the amount agreed to in the parties’ contract, in order to pay off the lienable obligations that would be coming due for the 1-29 well expenses. This fact serves as *958proof of an agreement to share in the venture’s profits and losses.18

Partnership status may also be proved by habit and prior course of dealing, as well as by a partner’s conduct and declarations.19 Evidence of a series of transactions covering several months between two parties engaged in a business in which both have a financial interest is competent to establish the existence of a partnership between such parties.20 Proof of the course of dealing between alleged partners in reference to other transactions under the same agreement and practically contemporary therewith is admissible to show the existence of a partnership.21 Evidence was admitted of Texas Moran’s conduct in the course of activities associated with the Lin-scott well, which had been drilled in cooperation with PinTex under the same type of agreement as the 1-29 well. There, Texas Moran had been involved in the removal of PinTex as operator of the working interest on the well. Texas Moran’s action in taking over the operation of the Linscott well and in paying off its liens convincingly buttresses the trial court’s finding that Texas Moran’s conduct evinced an implied agreement to allocate the losses of the 1-29 well. These factors amply satisfy the second prong of the mining partnership test.

B

THE EVIDENCE THAT SATISFIES PRONG THREE: COOPERATION IN THE PROJECT

Competent evidence supports the finding that Texas Moran, through its apparent agent Collins, cooperated in the project. The existence of an apparent agency must be found from the conduct or statements of the principal rather than those of the agent.22 Texas Moran never disavowed any action taken by Collins after their business relationship had officially terminated. In fact Texas Moran later requested Collins’ help and advice on several occasions. Although Texas Moran’s owner, an attorney with a graduate degree in law,23 stated that his business relationship with Collins ended when Collins was paid for his services in locating the 1-29 investment, other witnesses related that Collins continued to represent Texas Moran when he participated in the drilling decisions on the 1-29 well. Collins stated that after his employment had terminated, he communicated with Texas Moran about information he alone had received about well operations. These contacts included marking and sending electric logs to Texas Moran. All the working interest owners received drilling reports, but only Texas Moran had someone at the well site who appeared to be a company representative and received information not included in the drilling reports.

A settled course of conduct creates apparent authority for an agent which binds the principal who does not disallow or repudiate the agency in a timely manner, where a third party in good faith relies on the ostensible authority of the agent.24 The operator testified that Collins was frequently at the well site and maintained daily contact with operating personnel cón-*959cerning the drilling progress. He stated that he relied on Collins’, apparent authority when he complied with his request to suspend drilling in order to core the well, an action going to the heart of the business in which the parties had a joint interest.25

SUMMARY

Competent evidence clearly supports the trial court’s determination that Texas Moran met the three-prong Jenkins26 mining partnership test. The record plainly shows that Texas Moran (1) has a joint ownership in the leasehold estate; (2) by its course of action and the pattern of its conduct, displayed a willingness to share in the losses of the venture and (3) through the apparent agency of Collins, cooperated in the drilling of the well. Texas Moran’s own conduct vis-a-vis the well operator made it a partner in the drilling project. Once partnership status developed, Texas Moran’s liability to third party claimants attached, even though the latter may have been unaware of the true relationship.

I would affirm the trial court’s money judgment based on Texas Moran’s joint liability with the well operator, qua mining partner, for unpaid services and supplies furnished upon the well site.

. For a discussion of the elements in a mining partnership test, see Part III of this opinion.

. The agreement specified the participants were to take their share of the production in kind, with each investor individually responsible for marketing his proportionate share, without the investors’ sharing in the venture’s profits and losses.

. Deposition of J.W. Wood (PinTex President) at 18-19: "Q. Do you know Spencer Collins? A. Yes, I do.... Spencer Collins was an oil and gas man from down in Houston that I met one day in the PinTex office_ Q. Did you ascertain who he was working for? A. I thought he was associated with the Halli Corporation; and with the Pat Moran group in Texas, but I did not know in what capacity. Q. What information did you receive that made you come to that conclusion? A. The fact that the Pat Moran Company and the Halli Corporation bought some of Mr. Thomas' working interest in section 29, and it was during, after they purchased their interest that Mr. Collins was up in the office, and he discussed that he was representing some people that—in Texas that were investing in section 29." (Emphasis added.)

.Deposition of Glenn Thomas (well operator) at 19-20 [Record at 105-106]: “Q. Now, what active participation, if any, did any of the investors have in the drilling operations? A. The only one who made any suggestions whatsoever, and I realized this was because he was an experienced oil man, was Pat Moran, Texas Moran; and he, through his consultant, whose name was ... Collins, J. Spencer. He’s a consultant . to Texas Moran. Q. What did Mr. Spencer do? A. Spencer is an engineer, petroleum engineer. He went over the electric logs prior to completion. ... He insisted that we core the well during drilling operations, which I did. Mr. Collins and myself went over and calculated all the electric logs, correlated them with the core data, *956and decided where we would perforate, how many sacks of cement we would squeeze before we did the production perforations. I was in contact with him also, I think, probably every day. I didn't make a move in the field without calling Spencer. Ill put it that way." (Emphasis added.)

. This constituted but the common-law money judgment prong of the drilling company’s larger lawsuit (the latter includes an equitable stage to establish the priority of its lien claim vis-a-vis the other claimants) against the operator and nonoperating working interest owners in the 1-29 well.

. Okl., 383 P.2d 645, 647 (1963); see also discussion in Part III infra.

. Bradley v. Clark, Okl., 804 P.2d 425, 427 (1990); United Engines, Inc. v. McConnell Const., Inc., Okl., 641 P.2d 1101, 1102 (1981); Pracht v. Oklahoma State Bank, Okl., 592 P.2d 976, 978 (1979); Acme Glass v. E. V. Cox Const. Co., Okl., 578 P.2d 347, 349 (1978); Leveridge v. Notaras, Okl., 433 P.2d 935, 941 (1967); West v. Independent Sch. Dist. No. 2, McClain County, Okl., 412 P.2d 185, 188 (1966); D.W.L., Inc. v. Goodner-Van Engineering Co., Okl., 373 P.2d 38, 43 (1962); Sparks v. Midland Supply Co., Okl., 339 P.2d 1056, 1059 (1959); Smith v. Clark, Okl., 315 P.2d 960, 962 (1957); Bullard v. Caulk, 206 Okl. 353, 243 P.2d 691, 694 (1952); Continental Supply Co. v. Dickson Oil Co., 194 Okl. 660, 153 P.2d 1017, 1020 (1944); Barron v. Chicoraske, 189 Okl. 35, 113 P.2d 376, 378 (1941).

.A written contract alone may not be taken as conclusive proof of the true status of the parties. Both the effect of the contract’s language and the parties’ intent must be viewed in conjunction with the actual conduct of the parties in order to determine their status vis-a-vis one another. Enterprise Mgmt. Consul. v. State, ex rel. Oklahoma Tax Com’n, Okl., 768 P.2d 359, 362 n. 12 (1989); see also Hinson v. Cameron, Okl., 742 P.2d 549, 557 n. 32 (1987).

. Hinson v. Cameron, supra note 8 at 557, n. 32, quoting Brewer v. Bama Pie, Inc., Okl., 390 P.2d 500, 502 (1964); Hogan v. State Industrial Com’n, 86 Okl. 161, 207 P. 303, 304 (1922).

. Boigon and Murphy, Liabilities of Non-operating Mineral Interest Owners, 51 U.Colo.L.Rev. 153, 154 (1980); 3 C. Lindley, A Treatise on the American Law Relating to Mines and Mineral Lands §§ 796-803 (3rd ed. 1914).

. Mapel v. Long-Bell Lumber Co., 103 Okl. 249, 229 P. 793, 795 (1924), quoting Chapman v. Hughes, 104 Cal. 302, 37 P. 1048 (1894). See also 54 O.S.1981 § 207(1) of the Uniform Partnership Act, which provides in pertinent part:

"In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Section 16, persons who are not partners as to each other are not partners as to third persons. * * * " (Emphasis added.)

. Premier Inv. Co. v. Williams Iron Works Co., 178 Okl. 579, 63 P.2d 705, 706 (1937).

. Johnson v. Plastex Co., Okl.App., 500 P.2d 596, 598 (1971), quoting Mapel v. Long-Bell Lumber Co., supra note 11 at 795. In Johnson, at 598, the court noted that it would be “awkward” for sellers to be required to determine all those with an interest in the purchase, apart from the party making the purchase, in order to assure themselves of receiving payment.

. Okl., 350 P.2d 495, 501-502 (1960).

. Supra note 6 at 647, quoting Edwards v. Hardwick, supra note 14 at 501-502.

. Jenkins v. Pappas, supra note 6 at 647; see also Edwards v. Hardwick, supra note 8 at 501-502; McAnally v. Cochran, 170 Okl. 368, 46 P.2d 955 (1935).

. In Gottlieb Bros. v. Culbertson's, 152 Wash. 205, 277 P. 447, 449 (1929), the court noted that one of the most important tests of partnership status is whether there is a sharing of the losses of the venture.

. Daily v. Fitzgerald, 17 N.M. 137, 125 P. 625, 630 (1912).

. Rowley, Modern Law of Partnership, Vol. 2, § 51.4 at 415 (1961).

. Vogel v. Traders’ Compress Co., 129 Okl. 200, 264 P. 147, 149 (1928).

. Martin v. Browder, 109 W.Va. 542, 155 S.E. 640, 644 (1930).

. Where the person is the agent of another at the beginning of a transaction, and the principal has a means of knowing that the agent is in some way continuing to act in an agency capacity, it is negligence for the principal not to repu-chate the agency. Catlin v. Reed, 141 Okl. 14, 283 P. 549, 551 (1930); see also Fisk v. Bullard, 205 Okl. 502, 239 P.2d 424, 426-427 (1951). The positive testimony of witnesses may be disputed by facts and circumstances, and agency is a fact which may be established by circumstantial evidence.

. Pat Moran, Texas Moran’s owner, testified that after law school he got an L.L.M. [Trial Transcript at 110].

. Southwestern Portland Cement v. A.E. Beavers, 82 N.M. 218, 478 P.2d 546, 549 (1970). A principal whose actions lead the public to believe that his agent has authority to act is bound by his agent’s acts vis-a-vis any third party who *959believes the agent has such authority and deals with him in good faith. State v. Sellers, 258 N.W.2d 292, 297 (Iowa 1977).

. See Bromberg and Ribstein on Partnership, Vol. 1 § 2.14(4)(ii). In their discussion of Minute Maid Corporation v. United Foods, Inc., 291 F.2d 577 (5th Cir.1961), cert. denied, 368 U.S. 928, 82 S.Ct. 364, 7 L.Ed.2d 192 (1961), the authors note that the court allowed plaintiff-Minute Maid to recover from defendant-Cold Storage despite the fact that Minute Maid was unaware of the partnership relation between co-defendant United Foods and Cold Storage.

. Jenkins v. Pappas, supra note 6.