No. 87-169
IN THE SUPREME COURT OF THE STATE OF MONTANA
ROIL ENERGY CORPORATION, INC.,
CLINTON J. WHITE, SHIRLEY J. WHITE,
and JOSEPHINE R. WHITE,
Defendants and Appellants.
DRILCON, INC.,
Plaintiff and Respondent,
APPEAL FROM: District Court of the Eleventh Judicial District,
In and for the County of Flathead,
The Honorable Leif Erickson, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Murray, Kaufman, Vidal & Gordon; Daniel W. Hileman,
Kalispell, Montana
Leaphart Law Firm; W. William Leaphart argued, Helena,
Montana
For Respondent:
Scott & Tokerud; Keith Tokerud argued, Great Falls,
Montana
Submitted : O c t o b e r 28, 1987
Decided: J a n u a r y 1 9 , 1988
. m 1~9 1988
Filed :
Clerk
r . Justice L. C. Gulbrandson delivered the Opinion of the
Court.
Roil Energy Corporation and Clinton J. White, appeal
from a Flathead County District Court jury verdict awarding
Drilcon, Inc., $1,577,595.20 in damages for breach of
contract, negligence, and constructive fraud. All three
causes of action arise out of a contract entered into by
Drilcon and Roil for the purpose of drilling an oil well.
The jury found that Roil breached its contract with Drilcon
and held Clinton J. White, as President and alter ego of Roil
Energy Corporation, personally liable for $809,023.20 in
contractual damages by piercing Roil's corporate veil. The
jury found White additionally liable for his negligence and
constructive fraud in the amount of $768,595. Defendants
Roil and b7hite appeal the jury verdict. We affirm.
Val Holms incorporated Roil Energy Corporation in
Montana in April of 1979. Roil did no business and was not
capitalized at that time. Holms sold Roil to Clinton White
in June of 1981 to cancel a $3,000 loan. Holms was unable to
repay the loan and suggested that White "purchase" Roil for
$3,000.
White's previous business experience includes
involvement in several real estate developments and
management of two credit bureaus. White testified that he
bought the corporation to recoup his $3,000 loan to Holms and
to protect himself from personal liability while he
experimented with oil industry investments. White appointed
himself president of Roil and designated his mother and wife
as the other officers and directors. Holms held himself out
as an assistant vice-president to potential investors. Roil
was never capitalized.
In June of 1984, White negotiated and signed a
"farm-out" agreement with Pennzoil Corporation whereby Roil
was to drill an oil well on a Montana leasehold provided by
Pennzoil. Roil was to bear all risk, cost, and. expense of
drilling the well in exchange for royalties in the event the
well actually produced.
Holms then contacted Drilcon, a Texas corporation, and
negotiated a day-work drilling contract. Under the terms of
the contract, Roil was to pay Drilcon $6,500 per day to drill
an oil well. Section 7 of the contract provided that a third
party, Protea Capital Corporation of Dallas, Texas, would
establish an escrow account in the amount of $459,553 and
would pay Drilcon on a biweekly basis. The escrow was
requested by Drilcon to guarantee payment because Drilcon was
unfamiliar with Roil Energy Corporation.
On August 13, 1981, Drilcon forwarded the contract to
White for his signature, but before White could sign, Protea
backed out. Holms then secured another investor and arranged
to have Sun Escrow of Palm Springs, California, replace
Protea. Holms and an officer of Sun Escrow telephoned
Drilcon with assurances that the escrow had been set up in a
sufficient amount to cover Drilcon's estimated expenses for
drilling the well. Sun gave written confirmation of the same
in a telegram to Drilcon.
After receiving similar assurances from Holms and Sun,
White, in his capacity as president of Roil, signed the
original drilling contract on August 17, 1981. Neither party
attempted to amend the contract to reflect the substitution
of Sun Escrow for Protea Capital Corporation.
Drilcon began drilling on August 28, 1981, and
submitted invoices to Sun on a timely basis. However, Sun
made no payments on the first two invoices so Drilcon
contacted Holms about the delay in payment. Holms professed
no knowledge of the problem and promised to investigate. On
September 21, 1981, Drilcon received notification that Sun
Escrow could not pay because there were no funds in the
escrow account. Drilcon again called Holms and received
assurances that he would check the situation out and get back
to them. After two days with no response from Holms, Drilcon
ceased drilling at a depth of approximately 7,700 feet with
expenses of approximately $204,000.
Holms again solicited the help of numerous potential.
outside investors and represented to Drilcon that funding was
inevitable. Drilcon interviewed a number of these potential
investors and believed that the funding would soon he
forthcoming. In the meantime, Drilcon requested a written
guaranty and a promissory note from Holms before it would
resume drilling. Holms complied by sending Drilcon a
telegram personally guaranteeing the cost of drilling on
behalf of himself and Clinton White.
Holms immediately sent a copy of the telegram guaranty
to White. White consulted his attorney about the telegram
and was advised that Holms could not bind White with the
guaranty. Shortly thereafter, White informed Drilcon that
Holms' guaranty was unauthorized. Holms also gave Drilcon a
security interest in certain oil properties and a financial
statement listing his net worth at over $2.6 million. In
fact, as Drilcon was to learn much later in preparing for
litigation, Holms had a negative net worth at the time he
gave his personal guaranty and he no longer had an interest
in the oil properties.
At trial, the parties disagreed as to what Holms'
relationship was with Roil. Holms represented to Drilcon and
others that he was an assistant vice-president and testified.
to the same at trial. White disputes that Holms ever had
authority to act in any official capacity for Roil. White
specifically denied at trial that Holms ever had authority to
guarantee anything on White's or Roil's behalf. However,
White admits that he did not inform Drilcon that Holms was
not a vice-president of Roil Energy.
Based on Holms' guaranty and representations, Drilcon
resumed drilling in late September 1981 and eventually
reached the 12,500 foot depth called for in the contract on
December 2, 1981. White allowed Drilcon to resume drilling
depite his knowledge that the escrow was not funded, that
Holms' guarantee was worthless, and despite his own inability
to guarantee costs. Tests indicated that the well would not
produce. Shortly thereafter, Roil defaulted on its
obligations to Pennzoil. Pennzoil had the well plugged on
December 19, 1981.
A Drilcon representative testified his company believed
that Roil, with the help of outside investors, would pay the
costs of drilling or, alternativellr, that Holms and White
would pay. On December 31, 1981, Clinton White's attorney
wrote to Drilcon and stated that Roil would be "unable to
make the required payments for the drilling expenses incurred
... by virtue of the contract."
Drilcon sued Roil Energy in Texas on January 8, 1982,
and obtained a default judgment for contract damages. The
validity of the Texas judgment is questionable due to
improper service of process. Drilcon also obtained judgments
against Val Holms and Sun Escrow thereby prompting both to
file bankruptcy. To date, Drilcon has not recovered from
Holms, but has collected a $170,000 settlement from Sun
Escrow, said amount being deducted from the Montana district
court judgment. Drilcon filed this suit on August 13, 1982.
The jury found in favor of Drilcon and awarded damages. Roil
and White appeal and raise numerous convoluted issues. We
identify the following issues for review:
1. Must there be a fiduciary relationship as a
prerequisite to a finding of constructive fraud?
2. Did the District Court commit reversible error when
it allowed the jury to compare Holms' and Sun Escrow's fraud
with the alleged negligence of Clinton White and Roil Energy?
3. Did the fraud of Sun Escrow and Holms supersede any
negligence by Roil Energy and/or Clinton White?
4. Did the trial court correctly instruct the jury on
the elements of piercing the corporate veil?
5. Is constructive fraud sufficient to pierce the
corporate veil?
6. Is there substantial evidence in the record to
support the jury's piercing Roil's corporate veil?
7. Is there substantial evidence in the record that
Roil Energy breached its contract with Drilcon?
In their first issue, appellants assert that the
District Court committed reversible error when it gave the
following instruction to the jury:
The plaintiff Drilcon, Inc., has alleged
that the defendants are liable to it on
the basis of constructive fraud.
Constructive fraud means any breach of
duty which, without fraudulent intent,
gains an advantage to the person in fault
by misleading another to its prejudice.
There need be no fiduciary duty or
confidential relatTonship between parties
- justify a finding - constructive
to of
fraud. where a party, by his words or
conduct creates a false impression
concerning serious impairments or other
important matters and subsequently fails
to disclose relevant factors,
constructive fraud may be found.
(Emphasis added. )
The second sentence of the above jury instruction is taken
from § 28-2-406, MCA. Defense counsel objected to the third
sentence of the instruction at trial on the grounds that a
fiduciary relationship is required before constructive fraud
can be found. Appellants contend the instruction was
prejudicial because the special verdict form required the
jury to decide whether defendant Clinton White committed
constructive fraud.
Three Montana cases appear to support appellants'
argument that there must be a breach of a fiduciary
relationship in an action for constructive fraud. Rowland v.
Klies (Mont. 1986), 726 P.2d 310, 43 St.Rep. 1788; Morse v.
Espeland (Mont. 1985), 696 P.2d 428, 42 St.Rep. 251, 253;
Ryckman v. Wildwood, Inc. (1982), 197 Mont. 154, 641 P.2d
467. The latest of these cases, Rowland, states:
Constructive fraud is a breach of
fiduciary duty. (Citation omitted.) If
there is no fiduciary duty in the first
place, constructive fraud will not lie.
Rowland, 726 P.2d at 316. There are, however, several
Montana cases that recognize an exception to the rule as
stated in the above cases. McGregor v. Momrner (Mont. 1986) ,
714 P.2d 536, 43 St.Rep. 206; Mends v. Dykstra (1981), 195
Mont. 440, 637 P.2d 502; Poulson v. Treasure State Industries
(Mont. 1981), 626 P.2d 822, 38 St.Rep. 218; Hardin v. Hill
(1967), 149 Mont. 68, 423 P.2d 309. These cases stand for
the proposition that, under certain "special circumstances",
neither a confidential relationship nor a fiduciary
relationship is needed to find constructive fraud.
The last sentence of the jury instruction in question
embodies the "special circumstances" necessary for the jury
to find constructive fraud in this case:
Where a party, by his words or conduct
creates a false impression concerning
serious impairments or other important
matters and subsequently fails to
disclose relevant factors, constructive
fraud may be found.
It is evident from the record that White's words and conduct
created a false impression that either Roil, its officers, or
its shareholders would cover the costs of drilling the
oil-well. It is also evident tha.t White subsequently failed
to disclose relevant information concerning Holms', Roil
Energy's, and his own ability to fulfill the obligations
imposed by the drilling contract.
"Special circumstances" exist in this case which
support the jury's finding of constructive fraud. First,
F7hite used an improperly perfected corporate entity to shield
himself from personal liability and he failed to disclose
these corporate imperfections to his creditors. White also
failed to come forward with the truth about Holms' financial
affairs when White knew that Drilcon was relying on Holms'
personal guarantee. Finally, White failed to inform Drilcon
that Holms was not a corporate officer. The facts of this
case provided substantial credible evidence of "special
circumstances" for the jury to find White liable on a theory
of constructive fraud. Accordingly, the District Court did
not err in instructing the jury that no fiduciary or
confidential relationship was needed for a finding of
constructive fraud under the particular facts presented by
this case.
Appellants, in their second issue, argue that any
alleged negligence of Clinton White cannot be compared with
the fraudulent acts of Val Holms and Sun Escrow. The special
verdict form required the jury to apportion negligence
between Drilcon, Val Holms, Sun Escrow, Clinton White, and
"others." The jurv found Clinton White 95% negligent and
Drilcon 5% negligent. Defense counsel objected to this
portion of the special jury verdict form on the grounds that
the fraud of Holms and Sun Escrow intervene and supersede any
liability on klhite' s part. Appellants contend that the
special verdict form confused the jury, is contrary to
Montana law, and constitutes reversible error.
Appellants' argument on this issue must fail for two
reasons. First, 5 27-1-703, MCA, requires that the
negligence of all persons proximately causing damage to the
plaintiff is to be compared in a comparative negligence case.
White alleged contributory negligence and therefore forced
the court to consider comparative fault. Second, and more
importantly, the jury reached the right result by
apportioning negligence only between White and Drilcon.
It is evident from the jury's apportionment of
negligence that appellants were not prejudiced by the special
verdict form. The jury did not apportion any negligence to
either Holms or Sun Escrow. On the contrary, one-hundred
percent of the negligence was apportioned between White and
Drilcon. There is no cause for reversal in the absence of
prejudice to the party claiming error in the jury
instruction. State v. Hay (1948), 120 Mont. 573, 194 P.2d
232. We need not decide whether the special verdict form was
erroneous because appellants were not prejudiced.
In their third issue, appellants expand the above
argument further by contending that the fraud of Sun Escrow
and Holms are intervening causes that supersede appellants'
alleged negligence. Notably, appellants did not plead
intervening cause or superseding cause in their
answer/pre-trial order nor did they offer jury instructions
as to this issue. On the contrary, appellants specifically
plead contributory negligence in the pretrial order and
requested an apportionment of comparative fault. Appellants'
failure to offer an instruction regarding
superseding/intervening cause renders any alleged error
harmless. Kleinsasser v. Superior Derrick Services, Inc.
(Mont. 1985), 708 P.2d 568, 571, 42 St.Rep. 1662, 1666.
We also note with regard to appellants' third issue
that the jury was instructed as to several legal theories
. e l respondeat superior, actual and ostensible agency,
negligent misrepresentation, etc.) which could be used to
hold White liable for Holms' acts. The jury was also
instructed as follows:
Instruction No. 8: More than one person
may be responsible for causing injury.
If you find that one of the defendants
-
was negligent and that his negligence
proximately caused injuries to the
it - not a defense - -
plaintiff - - is - that some
third person may also have been
negligent. (Emphasls added.)
Under the instructions as given in this case, it would be
difficult, if not impossible, for the jury to formulate a
superseding cause theory on their own initiative. The facts
as applied to the jury instructions overwhelmingly support a
finding of White's negligence in this case.
Appellants' next issue questions the sufficiency of the
jury instructions regarding piercing the corporate veil. The
jury was instructed as follows on piercing the corporate
veil:
Roil Energy is a corporation organized
under the laws of Montana. As a general
rule the shareholders of a corporation
are not subject to personal liability for
corporate obligations. However, a
corporation's separate identity may be
disregarded when such corporation is
under the control of an individual, and
acted as that individual's agent as to
the particular transaction, or, when the
corporation's identity is so identified
with the individual sought to be held
liable as to make the corporation and the
individual one.
If a shareholder is not the "alter ego"
of the corporation pursuant to the stated
elements, he cannot be found personally
liable for the debts of Roil Energy. If
you find Clinton White is the "alter ego"
he can be found personally liable only if
there is a further showing the
corporation was utilized as a subterfuge
- defeat public convenience; - justify
to to
wrong or - -
to perpetrate fraud. (Emphasls
added. )
The special verdict form asked the following question
relevant to this issue:
B. Was Roil utilized as - subterfuge to
a
defeat public convenience to justify
wrong - - perpetrate fraud?-(Emphasis
or to
added. )
Answer "Yes" or "No."
The jury answered "Yes" and held White personally liable for
Roil's breach of contract. Both the jury instruction and the
special verdict form were drafted by the District Court on
the basis of a law review article entitled Piercinu the
Corporate - -in Montana, 44 Mont.L.Rev. 91 (1983).
Veil
Defense counsel objected to the "public convenience"
language in the two instructions on the basis that these
references confused the jury. Drilcon made a similar objec-
tion at trial and counsel for both sides expressed confusion
about the meaning of "public convenience." Even the District
Court admitted confusion as to the meaning of the term
"public convenience." Appellants argue in their forth issue
that the words "public convenience" were irrelevant and that
the language "caused [the jury] serious confusion."
This Court has repeatedly approved of the "public
convenience" language as used in the above instructions.
Meridian Minerals Co. v. Nicor Minerals, Inc., et al. (Mont.
1987), 742 P.2d 456, 462, 44 St.Rep. 1516, 1526; Flemmer v.
Ming (Mont. 1980), 621 P.2d 1038, 1042, 37 St.Rep. 1916,
1919; State ex rel. Monarch Fire Ins. Co. v. Holms (19421,
113 Mont. 303, 124 P.2d 994. Flemmer quotes with approval a
jury instruction using the same language as used in this
case. Appellants have presented no evidence that the jury
was confused by the words "public convenience" that would
justify reversal of this case.
"Public convenience" refers to something fitting or
suited to the public need. Black's Law Dictionary 1105 (5th
ed. 1979). There is no evidence that Roil Energy was used as
a subterfuge to defeat public convenience, but appellants can
claim no reversible error because there were sufficient
alternative grounds to pierce the corporate veil. The jury
was presented with substantial evidence of "fraud" and
"justifying wrongs" to pierce the corporate veil under the
alternate theories stated in the instruction. The trial
court did not err in giving the "public convenience"
instruction as one of three alternative grounds for piercing
the corporate veil.
Appellants argue in their fifth issue that there is no
evidence of actual fraud with which to pierce the corporate
veil in this case. Appellants point out that the special
verdict form and jury instructions list "fraud" as a basis
for piercing the corporate veil. Although the jury
specifically found Clinton White guilty of constructive
fraud, appellants contend that constructive fraud is
insufficient to pierce the corporate veil.
There are two prongs to piercing the corporate veil.
The jury must first find that White was the "alter ego" of
Roil. White does not contest the sufficiency of the evidence
in this regard. Secondly, there must be a showing that the
corporate entity was used as a subterfuge to defeat public
convenience, justify wrong, or perpetrate fraud. This Court
has held that something less than a positive showing of fraud
is needed to pierce the corporate veil. E.C.A. Environmental
Management Services, Inc. v. Toeynes (Mont. 1983), 679 P.2d
213, 219, 41 St.Rep. 388, 394. Other jurisdictions have held
that constructive fraud is sufficient to pierce the corporate
veil. White v. Jorgenson (Minn. 1982), 322 N.W.2d 607;
Sprecher v. Weston's Rar, Inc. (Wis. 1977), 253 N.W.2d 493;
Lewis Trucking Corp v. Commonwealth (Va. 1966), 147 S.E.2d
747. We hold that evidence of either actual fraud or
constructive fraud may be sufficient to pierce the corporate
veil in a given case.
We also note that the law as instructed in this case
does not distinguish between the acts of an alleged corporate
agent (Holms) as opposed to the acts of the party sought to
be held liable (White). There was fraud in this case. The
jury may have used Holms' fraud as an agent of Roil to
conclude that "the corporation was utilized as a subterfuge
to ... perpetrate fraud." The instruction does not require
that the party sought to be held liable act fraudulently.
The instruction only requires that the corporation be used
"as a subterfuge to perpetrate fraud."
In their sixth issue, appellants question the
sufficiency of the evidence to support any of the three
alternative grounds for piercing the corporate veil (i.e.,
public convenience, justify wrong, and fraud). This Court
will not reverse the verdict unless there is no substantial
evidence to support the findings of the jury. Poulson v.
Treasure State Industries, Inc. (Mont. 1981), 626 P.2d 822,
825, 38 St.Rep. 218, 221. There is substantial credible
evidence to support two of the three alternative grounds for
piercing the corporate veil in this case.
We first find that there was substantial credible
evidence that White was the alter ego of Roil. Roil was not
capitalized. White was the majority shareholder and was an
officer and director of Roil. White took all actions for the
corporation without consulting the other named officers and
directors. There was evidence that corporate formalities
were not adhered to and that White used his personal funds to
pay corporate debts.
Although there is no evidence that White used Roil to
defeat "public convenience," we find that there was also
substantial credible evidence of actual fraud, constructive
fraud, and of White's using the corporate entity to justify
wrong. Holms acted as Roil's agent when he committed fraud
against Drilcon. White failed to disclose his superior
knowledge about Holms' financial condition and telegram of
personal guaranty. White admits using the corporate entity
to shield himself from liability. He did nothing to manage
or supervise Holms yet hoped to gain when and if the oil well
was successful. The well was dry and White now hopes to
avoid the cost of drilling with an uncapitalized corporation.
The jury was entitled to conclude that it would be
inequitable or unjust for Drilcon to bear the loss in thSs
case.
Appellants moved for summary judgment prior to trial
asking that the trial court rule as a matter of law that
Drilcon waived the payment provisions of the contract when it
proceeded to drill without a properly funded escrow. The
trial court denied the motion. In their final issue,
appellants claim that it was error for the trial court to
submit the breach of contract issue to the jury and that the
motion for summary judgment should have been granted.
Appellants contend that the drilling contract
specifically required a third party, an escrow company, to
make the required payments to Drilcon. They assert that the
escrow provision and the provision in the drilling contract
requiring the "operator," Roil, to pay daily drilling costs
creates an ambiguity. This alleged ambiguity, appellants
argue, should be interpreted against Drilcon because Drilcon
drafted the contract.
Appellants also argue that Drilcon waived any right to
be paid under the drilling contract when it elected to drill
with no money in escrow. White cites Van Ettinger v. Pappin
(1978), 180 Mont. 1, 588 P.2d 988, for support. In
Van Ettinger, this Court held that the purchasers of a home
waived the right to enforce the provisions of a buy-sell
agreement when they closed the transaction with knowledge
that sellers were in possible breach. Appellants analogize
Van Ettinger to argue that Drilcon waived the payment
provision of an executory contract when it elected to drill
after learning that there was no money in escrow.
Drilcon points to the contract provisions and the
intent of the parties to argue that Roil is ultimately liable
under the contract. F e find that the contract is not
7
ambiguous as to the duties of Drilcon and Roil. The contract
does not state that Roil's payment is conditioned on an
escrow being set up. Neither the investors nor the escrow
company were parties to the contract and it was Roil's duty
to fund the escrow.
Even if the escrow provision of the contract is a
condition precedent waived by Drilcon, such waiver does not
release Roil of its obligation to pay Drilcon. Appellants'
reliance on Van Ettinger is rnisplaced because the contract in
the instant case was not wholly executory. Drilcon drilled
for a month before it learned of the lack of money in escrow
thereby making the contract no longer wholly executory.
White admits that the facts concerning this issue are
undisputed. The trial court believed the legal issue of
waiver was for the jury to decide. The jury was instructed
as to conditions precedent, waiver, ostensible agency, and
ostensible authority. The jury found for Drilcon. The
question for this Court is whether there is substantial
evidence to support the jury's finding that Roil breached its
contract with Drilcon.
The contract required the operator (Roil) to pay the
contractor's (Drilcon) daily expenses. The contract also
required that an escrow be established to ensure payment to
Drilcon. The contract is silent as to who was required to
secure funding for the escrow. The trial court allowed par01
evidence without objection as to the intent of the parties
concerning the escrow. Drilcon testified that it was Roil's
responsibility to find investors and fund the escrow. White
testified that it was Holms' responsibility and that Holms
was not an agent of Roil. No one disputes that Drilcon was
never paid.
Though some of the evidence presented at trial may
appear contradictory, it was the jury's prerogative to choose
to believe the testimony of one party to the exclusion of the
other. Tompkins v. Northwestern Union Trust Co. of Helena
(1983), 198 Mont. 170, 181, 645 P.2d 402, 408. We will not
assume the role of jury in this case, but will only review
the record to search for sufficient evidence to support the
jury's conclusions. Griffel v. Faust (Mont. 1983), 668 P.2d
247, 249, 40 St.Rep. 1370, 1372. There is substantial
evidence to support the jury's decision.
We hold that a fiduciary relationship is not needed for
a finding of constructive fraud under the "special
circumstances" of this case. We also hold that there is
substantial credible evidence that White committed
constructive fraud against Drilcon. The jury was not
instructed as to superseding or intervening cause and White
did not offer any jury instructions as to this theory. The
jury was instructed as to several other legal theories with
which they could hold appellants liable for Holms' acts.
There was sufficient evidence to support any of these
theories.
The jury was properly instructed as to the elements of
piercing the corporate veil. Although the parties were
unsure as to the meaning of "public convenience," there is no
evidence that the jury was similarly confused to appellants'
prejudice. In addition, the jury was presented with
alternative theories with which to pierce the corporate veil,
i. e., justifying wrong and fraud. There was sufficient
evidence to support both of these alternative theories. The
corporate veil was properly pierced in this case.
Finally, the drilling contract is not ambiguous. Roil
was to insure that Drilcon was paid either by funding an
escrow or by making the payments itself. Roil waived the
escrow provision when it failed to deposit adequate funds in
the escrow. The remaining provision in the contract
specifically states that Roil was to then pay Drilcon. There
is sufficient evidence that Roil breached the contract by not
paying Drilcon. Accordingly we affirm the District Court
jury verdict on all issues presented by this appeal.
Affirmed. ,
,/
/. 4'
We concur:
Mr. Justice John C. Sheehy, dissenting:
I dissent from the foregoing opinion opinion for several
reasons.
First, Clinton J. White should be relieved of any
liability for the first $217,000 of drilling expenses charged
by Drilcon. It is clear that before Drilcon began drilling
the well on August 28, 1981, it had been assured by an escrow
officer of Sun Escrow of Palm Springs, California, that the
escrow company had funds on deposit of $459,000 out of which
to pay Drilcon's expenses. Drilcon placed no reliance on
Clinton J. White or Roil Energy Corporation through any
statement or representation before it began drilling. It
relied exclusively upon the fraudulent representation of Sun
Escrow Company, that the funds were in place to pay its
drilling costs. On September 21, 1981, after Drilcon had
drilled down 7,700 feet and earned approximately $217,000 in
expenses, Sun Escrow Company wrote Drilcon that there was no
money in the escrow.
Clinton White was as much a victim of the fraudulent
actions of Sun Escrow as was Drilcon. Up to that point,
Drilcon placed no reliance on either Clinton White or Roil
Energy, and gave evidence of that nonreliance by refusing to
proceed at all until an escrow had been established to
Drilcon's satisfaction. Any liability at all of Clinton
White, therefore, should exclude the first $217,000 of
expenses because that expense was not incurred by Drilcon
through any fault, representation, constructive fraud,
negligence, or other legal theory obligating Clinton White.
Drilcon recommenced drilling when it received from Holms
his fraudulent asset statement and a telegram which Holms
sent, purportedly binding Clinton White personally to the
drilling cost. Drilcon began drilling again in spite of
having been told by White that he was not going to guarantee
the cost of drilling personally and that Holms had no
authority to make Clinton White personally liable. Mr. Ed
White, the vice-president of Drilcon testified:
Q. Did Mr. Clinton White ever tell you he would
not give his personal guarantee? A. I don't
recall him ever saying that. The only thing I ever
remember him saying was that Val Holms was not
authorized to speak on his behalf.
Q. Did you have any understanding after talking to
Clinton White whether he would give his personal
guarantee? A. I don't have a feeling that he
would or wouldn't. He didn't deny that he
wouldn't, and he didn't say that he would.
As to whether Holms was vice-president of Roil Energy
Corporation, the court itself wanted the evidence to be clear
and questioned the witness:
(BY THE COURT) Q. It has been pointed out that
Clinton White never denied that Val Holms was
vice-president. I guess I would reverse the
question. Did Clinton White ever tell you that Val
Holms was the vice-president of Roil? A. No.
Drilcon, therefore had no basis upon which to rely on
any personal guaranty of Clinton White or any representation
that Holms had authority to bind Clinton White for drilling
expenses.
Because Drilcon was specifically warned that White was
not personally liable and that Holms had no authority to bind
him, the discussions in the majority opinion about
constructive fraud and piercing the corporate veil are
irrelevant. Drilcon proceeded at its peril to complete the
drilling of the well.
Nonetheless, some remarks about the majority discussion
of constructive fraud and piercing the corporate veil are
necessary.
We make fuzzy the liability theory of constructive fraud
when we go outside the confidential or fiduciary
relationships and find that "special circumstances" can give
rise to liability under the theory of constructive fraud.
The statutory bases for constructive fraud are a breach of
duty or an act or omission especially declared to be
fraudulent by the law, each without respect to actual fraud.
Section 28-2-406, MCA. Unless we have an act especially
declared fraudulent by the law (not present here), we should
confine constructive fraud to those cases involving a breach
of duty and ordinarily that breach of duty arises either
through a confidential or a fiduciary relationship. We have
confused the liability theory of constructive fraud (mea -
culpa) by including in the constructive fraud theory "special
circumstances" in cases which really involve negligent
misrepresentations of fact. In cases of negligent
misrepresentation, the liability is founded not on a breach
of a legal duty arising out of constructive or fiduciary
relationships, but rather out of a duty to speak in the
circumstances, and where fraudulent intent is not an element.
To use an example first posed by the late, great Cardozo, if
we think of the fields of liability for constructive fraud
and misrepresentation as concentric circles with a common
center and differing radii, where the liability under each
theory is based on misrepresented facts, the breach of a
legal duty will create liability whereas a negligent breach
may not; the first because the liability is imposed by law,
whereas the liability for a negligent breach is based upon
ordinary care, and comparative negligence may be considered.
See Ultramares Corporation v. Touche (N.Y. 1931), 174 N.E.
441.
It is because we confused these two fields of liability
that the district judge in this case submitted to the jury,
as a comparative negligence issue, the determination of
comparative negligence of Drilcon, Roil, Sun Escrow, Clinton
White and Holms. The jury found Clinton White 95% negligent,
and Drilcon 5% negligent. A finding of comparative
negligence is completely inconsistent with liability on the
theory of constructive fraud, where there is no comparison to
be made (undoubtedly the court was thinking of mitigation of
damages, and submitted it in the form of comparative
negligence). Moreover, because the actions of Holms and of
Sun Escrow Company were fraudulent, those actions were not be
compared with the negligence, if any, of White.
The issues in this case were hopelessly confused, and I
would reverse and remand for a new trial. It goes without
saying that if constructive fraud is not sustainable in
this case, there could be no
Justice