MOORE, JUDGE.
These two consolidated appeals from Fayette Circuit Court involve a plaintiff's judgment awarding damages for fraud and breach of contract. The appellee is United American Energy, LLC (UAE). The appellants are Norman Ledford, Montie Parks, Cornelius Arthur, PAL Oil, LLC (owned by Ledford, Parks, and Arthur), and Arrowhead Enterprises of Kentucky, Inc (owned by Ledford and Arthur).
The appellants argue the circuit court's multifaceted judgment is erroneous in several respects. In particular, they argue that the circuit court erred in 1) asserting subject matter jurisdiction in this matter; 2) conducting a bench trial, rather than a jury trial; 3) holding PAL Oil, Arrowhead, Ledford, Parks, and Arthur liable for fraud in relation to their purported sale of an oil and gas lease they never owned (i.e., the "Tyree" lease) to UAE; 4) holding PAL Oil, Ledford, and Arthur liable for breach of contract and indemnity relating to the Tyree lease on the same basis; 5) holding Arrowhead, Ledford, Parks, and Arthur liable for breach of contract and indemnity relating to four other leases
Before we address the merits of this case, we will first address the appellants' contentions that the Fayette Circuit Court never had the authority to 1) prohibit the appellants from removing this matter to the United States District Court for the Eastern District of Kentucky; and 2) conduct a bench trial. Both of these contentions stem from clauses contained in two contracts that these parties executed herein (i.e., Section 18.5 of the 2006 and 2007 Agreements for the Purchase of Assets (APAs), which will be discussed more fully below). In both of these APAs, Section 18.5 provides:
As noted, the appellants' first argument relating to Section 18.5 is that the Fayette Circuit Court erred in prohibiting them from removing this matter to the United States District Court for the Eastern District of Kentucky. The entire substance of their argument is as follows:
This brief argument labors under several misapprehensions of Kentucky and federal law.
We will begin with the appellants' reference to "subject matter jurisdiction." When UAE filed this case in Fayette Circuit Court, the Fayette Circuit Court's subject matter jurisdiction over this matter was never at issue. "[S]ubject matter does not mean `this case' but `this kind of case.'" Harrison v. Leach, 323 S.W.3d 702, 705 (Ky. 2010) (citation omitted). The Fayette Circuit Court, as a court of general jurisdiction, has been vested with subject-matter jurisdiction over exactly the type of case UAE brought to it—contract disputes and suits in equity. Ky. Const. §§ 109 & 112(5); Kentucky Revised Statute (KRS) 23A.010; Peter v. Gibson, 336 S.W.3d 2, 5 (Ky. 2010). The Fayette Circuit Court "acquired jurisdiction of the subject matter [of UAE's claims] when the petition [or, as in this case, the complaint] was filed and summons issued[.]" Hudson v. Manning, 250 Ky. 760, 63 S.W.2d 943, 945 (1933). Consequently, there is no merit in the argument that the circuit court was not vested with subject matter jurisdiction.
Giving the appellants the benefit of the doubt, however, we will assume that they meant to assert that the Fayette Circuit Court should have dismissed this matter, in light of the forum selection clause, on the ground of improper venue. Certainly, both of the cases cited by the appellants—Plunkett and Prezocki, supra—stand for the proposition that when a litigant properly asserts an enforceable forum selection clause, the court should enforce it and dismiss the matter without prejudice.
The litigants in Plunkett and Prezocki sought to enforce their respective forum selection clauses prior to filing their answers in those matters. Plunkett, 583 S.W.2d at 99; Prezocki, 938 S.W.2d at 888. The defense of improper venue is among the irrevocably waivable defenses identified in CR
Here, the appellants waited over two years after UAE initiated this matter before asserting the forum selection clause of Section 18.5. They did not do so through a pre-answer motion, an answer to the original complaint, or through a matter-of-course amendment to that answer.
Aside from the rule of waiver stated in the Civil Rules, the general law of waiver in Kentucky also supports that the trial court correctly determined that this matter should not have been dismissed on the basis of the forum selection clause. "Our law is clear that a `waiver' is a voluntary and intentional surrender or relinquishment of a known right, or an election to forego an advantage which the party, at his option, might have demanded or insisted upon." Weinberg v. Gharai, 338 S.W.3d 307, 314 (Ky. App. 2011) (citing Barker v. Stearns Coal & Lumber Co., 291 Ky. 184, 163 S.W.2d 466, 470 (1942)). Unequivocally, the appellants knew from the onset of this litigation that they had the option, if it applied, to transfer this matter to the United States District Court for the Eastern District of Kentucky. Yet, as mentioned, they made no attempt to exercise this option or inform the circuit court of their intent to do so for over two years. They then sought to enforce the forum selection clause after the Fayette Circuit Court had already granted partial summary judgment against them on a number of UAE's claims for indemnity—claims that the appellants vigorously litigated.
In a footnote of their brief, the appellants assert that they could not have asserted the forum selection clause until two years into this litigation because "UAE answered damages interrogatories and produced documents (in February 2010) indicating that damages exceeded the federal jurisdiction minimum." Stated differently, the appellants claim that they simply could not have known that the United States District Court for the Eastern District of Kentucky could have assumed diversity jurisdiction of this case until February, 2010, when UAE attached a specific dollar figure to their claims.
Federal courts, particularly the United States District Court for the Eastern District of Kentucky, encourage the practice of parties conducting federal jurisdictional discovery in state courts; for an excellent summary of this practice, see May v. Wal-Mart Stores, Inc., 751 F.Supp.2d 946 (E.D. Ky. 2010). Nevertheless, 28 U.S.C.
As noted, Section 18.5 of the 2006 and 2007 Agreement also provides: "[UAE] and [appellants] hereby irrevocably waive, to the fullest extent they may effectively do so, their rights to a trial by jury[.]" In its complaint and subsequent amended complaints, UAE nevertheless asked for a trial by jury in this matter. In each of their answers, the appellants responded by stating that "[t]he parties have irrevocably waived their rights to a trial by jury under section 18.5 of the 2006 and 2007 Agreements, and as such, [UAE's] jury demand should be stricken." Prior to trial, UAE withdrew its jury demand. Thereafter, this matter was adjudicated by means of a bench trial, rather than a jury trial.
In contravention of the very contractual clause they repeatedly attempted to enforce, the appellants now argue that it was error for the circuit court to conduct a bench trial, rather than a jury trial. They point to nothing in the record demonstrating that they ever made any request for a jury trial before the circuit court and, as noted above, the record in this matter flatly contradicts that they ever desired a jury trial. Instead, their argument is based upon the following portion of CR 38.04: "A demand for trial by jury made as herein provided may not be withdrawn without the consent of the parties." In short, the appellants argue that the circuit court erred in conducting a bench trial because, as they now assert, they never consented to allowing UAE to withdraw its request for a jury trial.
As to where this argument was preserved for our review, the appellants have appended to their reply brief an affidavit of one of their attorneys. In this affidavit, the affiant represents that he was present at an unrecorded pretrial conference in this action on November 18, 2010; he recalled there being a discussion about the issue of whether the trial of this case would be by jury or bench trial; he recalled that the appellants did request a jury trial and argued that they had not consented to UAE's request to have a bench trial; and, he recalled that the appellants' arguments were overruled. In its own brief, however, UAE represents that the appellants did not raise this argument below. UAE argues, therefore, that it would be inappropriate for this Court to consider the merits of the appellants' argument.
The issue thus becomes one of proper preservation of error. As a general matter, "[t]he Court of Appeals is without authority to review issues not raised in or decided by the trial court." Regional Jail Authority v. Tackett, 770 S.W.2d 225, 228 (Ky. 1989) (citing Matthews v. Ward, 350 S.W.2d 500 (Ky. 1961); Combs v. Knott Co. Fiscal Court, 283 Ky. 456, 141 S.W.2d 859 (1940); Tipton v. Brown, 273 Ky. 496, 117 S.W.2d 217 (1938)). We determine which issues were raised in or decided by the trial court by reviewing the record of the trial court's proceedings. Thus, "[i]t goes without saying that errors to be considered for appellate review must be precisely preserved and identified in the lower court." Skaggs v. Assad, By and Through Assad, 712 S.W.2d 947, 950 (Ky. 1986) (citing Combs v. Knott County Fiscal Court, 141 S.W.2d 859 (Ky. 1940); CR 76.12(4)(c)(iv)).
Here, the appellants point to no authority, and we have found none, supporting that the affidavit of a litigant's counsel by itself is sufficient to preserve any purported error that is not apparent from the face of the record. Nothing prevented the appellants' counsel from preserving their objection to the trial court's purported error on the record following the unrecorded pretrial conference. And, to the extent that the appellants are attempting to argue that the record demonstrates error in this regard simply because it contains no written consent from them to not have a jury trial, we disagree. Nothing in CR 38.04 dictates how both parties may consent to withdrawing a demand for trial by jury. And, this Court will not presume that the appellants refused their consent, especially where the appellants made no demand for a jury trial themselves, actively opposed UAE's demand for a jury trial, and made no attempt to preserve any objection to UAE withdrawing its demand for a jury trial. Consequently, we find the trial court committed no error in conducting a bench trial.
Having addressed these introductory procedural issues, we will now address the myriad facts, causes of action, and claims of error involved in this matter. And, every fact, cause of action, and claim of error involved in this matter relates, in some way, to UAE's claim against the appellants for fraud and breach of contract regarding the Tyree mineral estate. Accordingly, this is where we will begin our analysis.
According to Ledford, Parks, and Arthur, who have some experience in the oil and gas industry but no legal education, the word "lease" can mean three different things when used in the context of mineral estates. First, it could be oil and gas industry parlance to describe the location of a mineral estate in which oil and gas rights lie, rather than any kind of actual contract. Second, it could be an agreement with a mineral owner, written or otherwise, conveying another person or entity the right to search for, produce, sell, and keep profits from the sale of oil or other minerals underlying specific real property. Third, it could mean permission from the Division of Oil and Gas Conservation in Kentucky's Department for Natural Resources—rather than from the owner of a mineral estate—to produce oil out of a specific abandoned well located upon another person's mineral estate, sell that oil, and keep the industry standard of 87.5% of the resulting profits.
As to whether the term "lease" could be used to simply describe the location of a mineral estate in which oil and gas rights lie (the first of the above three definitions), the record in this matter reveals no dispute.
Also, the second of the above definitions is a fair reflection of Kentucky law. As stated by the former Court of Appeals in Williams' Adm'r v. Union Bank & Trust Co., 283 Ky. 644, 143 S.W.2d 297, 300 (1940),
(Internal citations omitted.) One of the many other cases to the same effect is Ralston v. Thacker, 932 S.W.2d 384, 387 (Ky. App. 1996):
(Internal citations omitted.)
Their third definition of "mineral lease," however, appears to have caused the six years of litigation in this matter. That said, it is necessary to trace the genesis of this definition before we discuss its validity.
Ledford, Parks, and Arthur incorporated PAL Oil for the purpose of acquiring, packaging, and selling oil and gas interests. They frequently conducted their own title searches to locate mineral estate owners for the purpose of securing mineral lease agreements with mineral estate owners (the kind of mineral leases described in the second of the above three definitions). Sometime in the spring of 2005, Ledford, Parks, and Arthur became interested in the oil underlying property in Estill County owned by Roy and Ines Lindsey. Two oil wells, which Ledford, Parks, and Arthur believed had been abandoned, were also located upon this property. After checking the Estill County property records and conducting their own title search, Ledford, Parks and Arthur concluded that some previous owners in the Lindseys' chain of title—namely, Thorton William Tyree and Mary A. Tyree—had granted an oil and gas lease in the mineral estate underlying the Lindseys' property on January 17, 1915, and that the Lindseys owned only a surface estate as a consequence.
Ledford, Parks, and Arthur could not determine the identity of the current owner of the underlying mineral estate—a mineral estate which, thereafter, they referred to as the "Thorton Tyree lease," the "T.W. Tyree lease," and, alternatively, the "Tyree lease" (see, e.g., the first of Ledford's, Parks', and Arthur's above three definitions of "lease"). Nevertheless, Ledford, Parks, and Arthur remained interested in finding some way to explore for oil on this property. For a solution, Ledford testified that they turned to their longstanding attorney, Jim Combs:
The "abandoned well clause" Ledford referred to in his testimony is Kentucky Revised Statute (KRS) 353.730, entitled "Investigation of abandoned wells — Application — Report — Bond." In its entirety, it reads:
At the trial of this matter, Ledford, Parks, and Arthur testified that this statute described "the abandoned well process," which they understood authorized the Division of Oil and Gas Conservation in Kentucky's Department for Natural Resources to grant anyone "permission" to 1) investigate and test specific abandoned wells located upon a mineral estate owned by an unknown individual, without the consent of the unknown owner or his representative, in order to determine whether those abandoned wells were capable of producing oil; 2) produce an unlimited quantity of oil out of those abandoned wells in the event that oil was discovered; and 3) keep the industry standard of 87.5% (or 7/8ths) of any proceeds realized from the sale of that oil.
Ledford also testified that another "advantage" of this "abandoned well process" is that, when utilized, it discouraged other third parties from attempting to secure a mineral lease with the owner of the subject property:
To prevent confusion, we pause here to state that Ledford's, Parks', and Arthur's understanding of KRS 353.730 is a gross misinterpretation of the actual law. Nothing in KRS 353 et seq., provides the Division with the authority to allow individuals to produce oil from a mineral estate without first securing the consent of the mineral estate's owner or, if that mineral estate owner is unknown, a court-appointed trustee
Another contradiction of Ledford's, Parks', and Arthur's understanding also appears in KRS 353.730(1)(c), which requires an applicant for the testing permit described in that statute to certify, before the Division will even issue him a testing permit, that "he has the authority to enter the property upon which the well is located and to conduct the investigation."
This hits the heart of the problem: Ledford's, Parks', and Arthur's interpretation of KRS 353.730 (the third of their above-stated definitions of "lease") fails to distinguish between permission from the Commonwealth to engage in a regulated activity on the one hand, and, on the other hand, an oil and gas lease under Kentucky law. A mineral lease relating to oil and gas grants to the lessee the right to explore for oil and gas on a specific mineral estate. Ralston, 932 S.W.2d at 387; Union Bank & Trust Co., 143 S.W.2d at 300. This right to explore is exclusive. Central Kentucky Natural Gas Co. v. Smallwood, 252 S.W.2d 866, 868 (Ky. 1952) (reversed on other grounds by Texas American Energy Corp. v. Citizens Fidelity Bank & Trust Co., 736 S.W.2d 25 (Ky. 1987)). And, according to MERRIAM-WEBSTER'S COLLEGIATE DICTIONARY 441 (11th ed.2003), "explore" means:
True to this definition, the statutes controlling the activity of exploring for oil describe some examples of how one might explore for oil. For instance, a person or entity that has secured the right to explore for oil on a given mineral estate (see again, "operator" as defined in KRS 353.510(17)) might drill a new oil well or deepen or reopen an existing oil well, provided he obtains a permit from the Commonwealth to engage in that regulated activity. See KRS 353.570(1). The same person or entity might also exercise the same right to explore for oil by investigating, studying, and analyzing (see WEBSTER'S, supra) any abandoned oil wells he discovers on his oil and gas lease, provided that he follows KRS 353.730 which, as noted, is entitled "Investigation of abandoned wells..." (Emphasis added.)
To summarize: 1) the right to explore a mineral estate for oil is only granted by the owner of the mineral estate, his representative, or a court-appointed trustee; 2) drilling a new oil well, deepening or reopening existing oil wells, and investigating abandoned wells are simply means and methods of effectuating the right to explore a mineral estate for oil; and 3) these means and methods, in turn, are activities regulated by the Commonwealth of Kentucky and cannot be employed without first securing its permission through the Division of Oil and Gas Conservation. In that sense, exploring an abandoned well on someone else's mineral estate in Kentucky is much the same as driving someone else's automobile: If you want to do it, you need among other things 1) permission from the owner or the owner's representative, and 2) a license or permit from the state. If Ledford's, Parks', and Arthur's interpretation of the law regarding the testing of abandoned wells was also the law regarding driving someone else's car, it would allow anyone with a drivers' license to steal another person's car.
How, then, did Ledford, Parks, and Arthur come to their conclusion regarding the meaning of KRS 353.730?
As mentioned above, Ledford testified that their attorney, Jim Combs, was the first to recommend that Ledford, Parks, and Arthur utilize KRS 353.730 as a means of "acquiring wells" on the Lindseys' property. Combs testified that at or about this time, he was working for the appellants on a "more or less continual basis." As he recalled it in his own testimony, he thought the appellants learned about the "abandoned well process" from the Division of Oil and Gas Conservation.
According to Ledford, he, Parks, and Arthur then sought further clarification of the procedures for invoking this statute from Rick Bender, who was at the time the Director of the Division of Oil and Gas Conservation.
Regarding the procedure to be followed in the event that the identity of the owner of the mineral estate connected to the abandoned wells could not be ascertained, Ledford further testified:
As Ledford understood it, an applicant for a well testing permit could thereafter submit a surface agreement (an agreement with the owner of the surface property above the mineral estate allowing entry onto the surface property) and proof of an attempt to find the mineral estate owners (by advertising in the classified section of two local newspapers for three weeks) to the Division; the Division would then issue a permit to test a specific abandoned well and produce oil from that well for a period of 60 days (pursuant to KRS 353.730(2)); and, if the permittee chose to continue producing oil beyond 60 days, the Division would require the permittee to place that particular well under his bond (also pursuant to KRS 353.730(2)), and then allow the permittee to continue producing that well and selling oil from that well indefinitely. As to the profits realized from the sale of any oil produced, Ledford testified that the unknown owner would receive a 1/8th share, and the permittee would be allowed to keep the remaining 7/8ths.
With this in mind, we now turn to how Ledford, Parks, and Arthur applied what they understood about the "abandoned well process."
They began by obtaining a surface agreement with Roy and Ines Lindsey, which the Lindseys executed on April 4, 2005. The relevant part of this surface agreement, which Parks drafted, provides:
Ledford, Parks, and Arthur would later testify that they meant for the word "lease," as used in this surface agreement, to carry the meaning of the first of their three above-referenced definitions (i.e., "the location of a mineral estate in which oil and gas rights lie, and not an actual contract with the mineral owner.") But, the Lindseys would later testify that at the time they executed this agreement they understood the word "lease," as used in this surface agreement, to mean that Ledford, Parks, and Arthur had already secured an agreement with a mineral owner conveying an interest in the minerals underlying their property—the second of the three above-referenced definitions.
After securing this surface agreement, Ledford then sent the following letter to the Division of Oil and Gas, in care of Rick Bender. This letter is dated April 9, 2005, and provides in relevant part:
Ledford, Parks, and Arthur later testified that in their opinion it was evident from this letter that they were using the word "lease" to simply mean "the location of a mineral estate in which oil and gas rights lie, and not an actual contract with the mineral owner" (again, the first of their above-stated definitions).
On April 12, 2005, Ledford faxed requests to two newspapers in the Estill County area to run the following advertisement:
On May 4, 2005, Deana Wilmoth of the Division of Oil and Gas Conservation responded to Ledford's April 9, 2005 letter. She advised that the Division was processing PAL Oil's "request to test two wells on the T.W. Tyree lease," and instructed PAL Oil to "please complete the enclosed testing permit applications for those wells."
The record also contains two Division of Oil and Gas Conservation testing permit applications that Ledford completed and Parks notarized regarding wells 41
About this time, Montie Parks' wife, Linda, called Ines Lindsey on behalf of PAL Oil and informed her that PAL Oil "may not be getting the lease" relating to the Tyree mineral estate. Also about this time, Shelby Oil and Gas Exploration, LLC, one of PAL Oil's rivals, informed the Lindseys that the appellants did not have any lease agreement with respect to the Tyree mineral estate and that it believed the Lindseys were the actual Tyree mineral estate owners. On May 13, 2005, Shelby Oil and Gas entered into a mineral lease agreement with the Lindseys regarding the Tyree mineral estate. Ines Lindsey testified that she did not notify the appellants about this lease or inform the appellants that she and her husband were rescinding the April 4, 2005 surface agreement.
Parks and Ledford both testified that they were aware of the Lindsey-Shelby lease while they were applying for abandoned well testing permits with the Division. The appellants could not recall whether they informed the Division of the Lindseys' claim of ownership—their "abandoned well process" theory apparently would have required them to do so
On June 1, 2005, Marvin Combs of the Division of Oil and Gas Conservation wrote two letters to PAL Oil. These letters related, respectively, to two wells on the T.W. Tyree mineral estate and described different permit numbers relating to these two wells ("N13458," which related to "Tyree Well 41, Estill County," and "N13457," which related to "Tyree Well 42, Estill County"). In relevant part, both letters provided:
Marvin Combs' use of the word "operator" in this letter raises a question about whether the Division actually did understand the word "lease," as Ledford had used it in his April 9, 2005 request letter, to mean the location of a mineral estate in which oil and gas rights lie (as Ledford, Parks, and Arthur testified they intended it to mean), rather than that Ledford, Parks, and Arthur had secured an agreement with the Tyree mineral estate owner conveying the right to explore for oil in that property (see again, their second definition). Nevertheless, by following what they testified they understood about the law, Ledford, Parks, and Arthur were indeed able to secure the Division's permission, per KRS 353.730, to investigate two abandoned wells on the T.W. Tyree mineral estate without securing the consent of the unknown mineral owner, his representative, or his court-appointed trustee.
Subsequently, Ledford, Parks, and Arthur informed the Division that they were electing to keep wells 41 and 42 on the T.W. Tyree mineral estate in production. On March 6, 2006, the Division sent PAL Oil two letters—one regarding well 41 and another regarding well 42—each providing in relevant part:
Ledford, Parks, and Arthur testified that they believed, thereafter, that PAL Oil had acquired the variety of "lease" in the T.W. Tyree mineral estate described by their third definition (e.g., an "abandoned well interest"). But, Ledford, Parks, and Arthur had incorporated PAL Oil for the purpose of acquiring, packaging, and selling oil and gas interests. Thus, having "acquired" their "abandoned well interest" in wells 41 and 42 in the Tyree mineral estate, Ledford, Parks and Arthur then packaged it with approximately twenty leases they had already acquired in Southeastern Kentucky and proceeded to search for a buyer.
Some evidence suggests that Ledford, Parks and Arthur created a marketing prospectus for PAL Oil stating that it had the "T.W. Tyree lease," and that it was "for sale now." No evidence demonstrates that United American Energy, LLC (UAE), ever received this marketing prospectus or relied upon it.
Ledford also sent a letter to Ryan Klinghoffer (a corporate officer at Madison Capital Management, the parent company of UAE) on April 19, 2006, stating that PAL Oil had "spent weeks in the court houses proving [its] validation of [its] leases, and even [UAE's] attorney here in Lexington, has agreed that we could close on this deal as early as Friday, if you would let him draw up documents[.]" But, Klinghoffer never testified in this matter; no evidence demonstrates that he or any other officer at Madison Capital or UAE ever received this letter or relied upon it; and Brian Gordon, who ultimately authorized UAE's purchase of these leases from PAL Oil on April 28, 2006, testified that this transaction rapidly progressed simply due to "business purposes."
The record does demonstrate, however, that Ledford faxed UAE's attorney, Chris Van Bever, several documents, accompanied by a cover page bearing Arrowhead's letterhead, entitled "lease data" on or about April 13, 2006. Among these documents was a copy of the original oil and gas lease conveyed by Thorton William Tyree and Mary A. Tyree on January 17, 1915, referenced above. Ledford also faxed Van Bever additional documentation on April 18, 2006, along with a cover page bearing Arrowhead's letterhead, stating "Dear Chris, here is the T.W. Tyree information." Included with this later fax were: 1) an executed copy of the Lindseys' surface agreement; 2) the two above-referenced March 6, 2006 letters from the Division to PAL Oil; 3) a copy of an April 9, 2005 check for $50 from PAL Oil (signed by Ledford) to the Kentucky State Treasurer, stating on its memo line "Div. Oil & Gas, test 2 wells TW TYREE lease application"; 4) copies of the classified sections of two Estill County newspapers containing PAL Oil's advertisements relating to the T.W. Tyree mineral heirs; 5) copies of the Division's June 1, 2005 letters to PAL Oil; and 6) a copy of a one-page "division order" relating to the oil produced from "the T.W. Tyree Lease."
This division order, which is the last of the documents Ledford faxed to Van Bever on April 18, 2006, warrants further explanation because it would play a significant role in UAE's claim against the appellants for fraud—a claim based in part upon UAE's allegation that the appellants forged this division order in an effort to intentionally misrepresent that they held an actual mineral lease (see, again, the second of Ledford's, Parks', and Arthur's definitions for that phrase) in the T.W. Tyree mineral estate.
As an aside, a "division order" is
BLACK'S LAW DICTIONARY 494 (7th ed. 1999). The typical division order might, therefore, imply that the oil purchaser who issued it has agreed that an oil producer has a valid ownership interest in the oil being produced.
Here, the division order that Ledford transmitted to Van Bever provided that it had been issued by South Kentucky Purchasing Company (an oil purchasing company) to PAL Oil on March 27, 2006. "YOUR COPY" was stamped onto the upper right-hand corner. In relevant part below that, the order recites:
Ledford later testified that PAL Oil did not execute this division order because PAL Oil never actually produced any oil from wells 41 or 42. As to whether South Kentucky Purchasing Company actually issued this division order (and therefore agreed that PAL Oil had a legitimate ownership interest in the oil produced from wells 41 and 42), the only evidence presented at trial in this regard came from Ledford's testimony.
In short, it is impossible to determine from the state of this record whether Ledford created this division order, or whether South Kentucky Purchasing believed in the veracity of the "abandoned well process" and actually issued it.
Ledford testified that he and the other appellants received their understanding about the "abandoned well process," at least initially, from their longstanding attorney, Jim Combs:
At the trial of this matter, Combs testified that he is an attorney who has practiced in Kentucky since 1967, primarily in the field of mineral law. He testified that he was working for Ledford, Parks, and Arthur "on more or less a continual basis" from January to April of 2005, during the time of these events. He testified that he never offered Ledford, Parks, and Arthur any legal advice with respect to the procedures under Kentucky law for locating mineral estate owners or securing mineral leases on property owned by unknown mineral heirs. He also testified that he had no personal knowledge of the substance of any conversation Ledford, Parks, and Arthur may have had with the Division of Oil and Gas Conservation regarding the "abandoned well process."
Nevertheless, before UAE and PAL Oil entered into an agreement, the record in this matter reflects that Combs endorsed and fully adopted Ledford's, Parks', and Arthur's understanding about the "abandoned well process." Indeed, Combs testified that he represented it as the law of Kentucky to both Van Bever and Klinghoffer when he acted as the attorney for PAL Oil and the other appellants prior to and at the April 28, 2006 closing of this transaction:
Furthermore, Combs testified that PAL Oil's "abandoned well" rights included the right to sell any oil it produced in the course of its investigation and keep an 87.5% working interest in the proceeds, stating that "They have to sell the oil they produced when they, uh, investigate the well. They can't just... You have to do something with it. You can't just leave it in the tank."
Likewise, Ledford, Parks, and Arthur testified that the substance of the "abandoned well process," as summarized above, was squarely presented to Van Bever and Klinghoffer several times prior to and at the April 28, 2006 closing. Their testimony is not contradicted by any other testimony of record because Klinghoffer did not testify at all, and Van Bever could not recall the substance of any specific conversations he had with any of the appellants at or about that time.
The failure to call Klinghoffer as a witness is highly relevant in this matter for a number of reasons. Whether Klinghoffer understood the appellants' "abandoned well process" theory the way the appellants intended is debatable. The record contains an April 25, 2006 investment proposal generated by Klinghoffer and submitted to UAE's parent company, Madison Capital, which listed the T.W. Tyree lease as one of the approximately 20 leases that the appellants were offering for sale in this transaction. Brian Gordon, the officer of UAE who authorized UAE to purchase the leases from the appellants and executed this agreement on UAE's behalf, testified at the trial of this matter that Klinghoffer's investment proposal was the only document he relied upon or reviewed in deciding whether UAE should consummate this transaction. Gordon testified to having no knowledge of how or why Klinghoffer concluded that the Tyree lease was to be a part of this transaction. Moreover, the record in this matter does not disclose whether Klinghoffer reviewed any of the materials contained in Ledford's April 13 or 18, 2006 faxes to Van Bever, i.e., the division order, the copy of the original Tyree lease, etc.
As to Van Bever, he was tasked not only with representing UAE's interests in this transaction, but also with drafting the agreement for the purchase and sale of assets ("2006 APA") between UAE and the appellants. He testified that he was ultimately responsible for memorializing what assets were to be included in this transaction. Schedule 2.1(d) of the 2006 APA provides that UAE would purchase personal property from PAL Oil located on the "T.W. Tyree Lease," including "4 pump units," "650 feet tubing," "640 feet rods," "2 100 bbl tanks," and "1 separator" from PAL Oil. Schedule 2.1(b) of the 2006 APA provides that PAL Oil would transfer its two permits to "Tyree Well[s]" 41 and 42 to UAE. But, Schedule 2.1(a), entitled "Leases to be Assigned by PAL Oil Company, LLC,"
The appellants' counsel also questioned Van Bever about KRS 353.730 and the "abandoned well process":
Regarding the reference to Deana Wilmoth, she is with the Division of Oil and Gas Conservation. She wrote the letter to PAL Oil on May 4, 2005, regarding PAL Oil's request to test wells 41 and 42 on the Tyree mineral estate. As Combs and Van Bever both testified, Wilmoth also corresponded with Van Bever via email on April 27, 2006 regarding the "ownership" of these two wells. In relevant part, Van Bever wrote:
Thus, Van Bever testified that he had no recollection of the appellants and their attorney explaining "the abandoned well process" to him prior to the closing of this transaction. He further testified that he had made a mistake in omitting an assignment of a Tyree leasehold interest from the 2006 APA because it appeared to him, four years after he drafted the 2006 APA and allowed UAE to execute it, "that there's enough documentation out here now to lead someone to the conclusion that it may have just been omitted." (Emphasis added.)
But, nothing demonstrates Van Bever understood that the appellants were offering to sell UAE a mineral lease from the owner of the Tyree mineral estate, rather than their purported "abandoned well interest." Van Bever previously testified that he made no mistake in omitting the Tyree lease from the 2006 APA. He did not remember the appellants telling him they had a lease agreement respecting the Tyree mineral estate and had no memory of ever seeing such a lease. He agreed with the appellants' incorrect interpretation of KRS 353.730 and their "abandoned well process" theory when questioned at trial. Van Bever drafted the 2006 APA to omit any reference to a Tyree leasehold interest being assigned in that transaction. He drafted the 2006 APA to only include wells 41 and 42 on the Tyree mineral estate and personal property associated with those wells. Furthermore, he allowed UAE to execute the 2006 APA one day after a representative of the Division of Oil and Gas Conservation told him in an email that PAL Oil "own[ed]" wells 41 and 42 on the Tyree mineral estate.
The 2006 APA that PAL Oil executed required PAL Oil to inform UAE of any known claims of third parties affecting any interest PAL Oil was conveying to UAE; it was also personally guaranteed by Ledford and Arthur (but not Parks). The record does not demonstrate that Combs or any of the appellants ever informed UAE of the May 13, 2005 Lindsey-Shelby lease, mentioned previously. For their part, Combs, Parks, and Ledford each testified that they believed the Lindsey-Shelby lease was invalid and that the two wells the Commonwealth had "given" to PAL Oil through the "abandoned well process" constituted an ownership interest in the Tyree mineral estate that was entirely distinct from a mineral lease given by the owner of a mineral estate. As Parks would summarize in his own testimony,
In any event, because UAE did not have experience in the oil and gas industry, it entered into an agreement with Arrowhead (Ledford's and Arthur's company). Under this agreement, Arrowhead would operate and manage the oil assets UAE had purchased from the appellants in exchange for $4,000 per week. This agreement remained in effect from April, 2006, to June, 2007.
On or about August 18, 2006, Parks received a letter from an attorney in Estill County named Michael Dean:
(Emphasis added.)
Parks testified that he probably had a conversation about this letter with Ledford.
On August 23, 2006, Combs telephoned Dean. At the trial of this matter, Combs recited and reaffirmed his notes of the conversation he had with Dean. In relevant part, Combs' notes state:
Combs' notes also contain the following statement: "Not discussed: Is he revoking his written authority?" According to Combs' recollection of their telephone conversation, Dean stated that he had been unaware, prior to writing his letter to Parks, that the Lindseys had executed the April 4, 2005 surface agreement. The record also does not demonstrate that the Lindseys made any further effort to assert the invalidity of the surface agreement until approximately September, 2007.
On its own motion, the trial court asked Combs why he, rather than UAE, had communicated with Dean:
UAE was never informed of Dean's letter or his conversation with Combs. For his part, Combs testified that he just assumed Dean would have contacted UAE on his own after speaking with him over the telephone.
Contrary to what Combs assumed, however, Dean did not contact UAE; at least, not immediately. Instead, on November 6, 2006, Dean organized and became the managing member of "Big Sinking Energy, LLC," an entity that, like PAL Oil, was in the business of acquiring oil and gas leases.
Ledford, Parks, and Combs became apprised of the Big Sinking-Lindsey lease sometime in either December of 2006 or January of 2007. Ledford testified that he sent a copy of this lease along with a letter to Van Bever and UAE's general manager in the area, Nick Reel,
This letter reflects that Ledford attempted to inform UAE about the Lindseys' claim of right to the Tyree mineral estate; it reflects Ledford's belief that the Lindseys' claim was invalid; and, it reflects his belief that the Lindseys' claim could "mean bad news."
It is also unknown what Ledford meant when he used the phrase "bad news" in his January 20, 2007 letter, given that he and the other appellants testified that they believed their "abandoned well interest" they had "assigned" to UAE simply had nothing to do with any kind of mineral lease. However, in either December of 2006 or January of 2007, Ledford discovered Chesapeake Appalachia, LLC, an Oklahoma limited liability company, which purported to own either the Tyree mineral estate itself or an oil and gas lease relating to that property. Ledford also contacted its representative, Dan Striper. Among the several faxes and letters Ledford sent to Striper around this time (using Arrowhead letterhead) is a January 31, 2007 letter Ledford mailed to "Chesapeake Energy[
At the trial of this matter, Ledford was asked about this letter. In part, he testified:
Ledford further testified that he would have sold the mineral estate to UAE if he had purchased it from Chesapeake. If Chesapeake only held a mineral lease in the property, Ledford testified that he would have purchased an assignment of the lease and reassigned it to UAE "for free" because:
The appellants did not purchase anything relating to the Tyree mineral estate from Chesapeake, although the record in this matter does not explain why. The appellants also did not inform UAE that they had contacted Chesapeake, or that they had attempted to locate the party holding rights to the Tyree mineral estate, or that Chesapeake claimed to hold rights in the Tyree mineral estate. And, as Ledford's testimony indicates, he and the appellants were in the process of brokering a second deal with UAE for the purchase of additional leases around this time.
On February 27, 2007, PAL Oil and Arrowhead entered into a second asset purchase agreement whereby UAE paid the appellants an additional $1,715,000 (the "2007 APA"). As before, Combs represented the appellants in this transaction and at its closing. Afterward, the appellants continued to produce the oil and gas leases for UAE under their master service agreement, but their business relationship concluded in June, 2007, after UAE declined to buy a third package of leases from the appellants.
During the term of their master service agreement with UAE, the appellants never produced oil from anywhere on the Tyree mineral estate, let alone from wells 41 and 42. It was not until after the master service agreement ended that UAE began operations in that location. And, when UAE did begin its operations there, it started to rework oil wells, build roads, and prepare the entire Tyree mineral estate for oil production. Indeed, of the several UAE and Madison Capital employees and attorneys who would later become witnesses in this matter, all of them—except for Nick Reel and Chris Van Bever—would testify that UAE, at that time, believed that it had acquired a lease from the appellants with respect to the entire Tyree mineral estate.
Shortly after UAE began its activities on the Tyree mineral estate, a few of its employees were confronted by Roy Lindsey, who told them that PAL Oil had not sold UAE a valid lease. Michael Dean followed up Roy Lindsey's confrontation by composing a letter to UAE, in care of Nick Reel, on behalf of both the Lindseys (his clients) and Big Sinking Energy (his company). His letter, dated September 20, 2007, provides:
John Rhorer, UAE's subsequent attorney,
The "Amended Assignment and Assumption of Leases," which Rhorer faxed along with his letter to Combs, provided in relevant part:
Combs testified that he never spoke with Rhorer about this amended assignment or advised Ledford about it. Instead, he "just put it on the fax machine and sent it on to [Ledford] because [Ledford] was the one that had to deal with it ultimately." When Combs faxed Rhorer's amended assignment to Ledford, Combs simply wrote on the cover page of his transmission, "Do you agree with this?"
Somewhat to the contrary, however, Ledford testified that Combs had actually called him and that they had spoken about the amended assignment prior to when Ledford ultimately executed it. Parks testified that he and Ledford had Combs "look it over." Ledford further testified:
Parks testified to similar effect. When Ledford executed the amended assignment in his capacity as PAL Oil's president on September 26, 2007, he faxed it to Rhorer with a cover page bearing the following handwritten statement:
(Emphasis added.)
At trial, Ledford testified that he did not understand the amended assignment was asking him to represent that PAL Oil had assigned UAE an oil and gas lease from the owner of the Tyree mineral estate. Ledford testified that he thought the purpose of the amended assignment was to assign UAE PAL Oil's surface agreement with the Lindseys, which had been inadvertently omitted from the 2006 APA. Ledford testified that he thought the amended assignment was using the word "lease" to mean that PAL Oil was "quitclaiming" any other part of its abandoned well interest to UAE that it had mistakenly omitted from the 2006 APA. However, Ledford also testified that he executed the amended assignment and faxed it back to Rhorer without asking Rhorer for an explanation.
Upon receiving Ledford's executed amended assignment, Rhorer included it with a letter he composed to Dean and the Lindseys on September 27, 2007:
About the same time of this letter from Rhorer on behalf of UAE to Dean, UAE was also seeking an expedited title opinion to verify its ownership of a leasehold interest in the Tyree mineral estate. And, on October 12, 2007, UAE received a title opinion from attorney William Kendrick concluding that Chesapeake Appalachia—rather than PAL Oil or UAE—was the current assignee of the original January 17, 1915 Tyree mineral lease.
Shortly after receiving Kendrick's title opinion, UAE contacted Chesapeake Appalachia and explained that it had believed that it had purchased an assignment of the January 17, 1915 Tyree oil and gas lease from PAL Oil. UAE also explained that it had begun producing oil from that property. After some negotiation, UAE secured an assignment of the Tyree lease from Chesapeake, but only after agreeing to pay Chesapeake a royalty interest of 3/16ths, rather than the standard 1/8th.
Over the course of its negotiations with Chesapeake, UAE filed the instant matter against PAL Oil and Arrowhead on December 27, 2007, in Fayette Circuit Court. On or about February 25, 2008, the Lindseys (represented by Dean) filed suit against UAE and PAL Oil in Estill Circuit Court to rescind the PAL Oil-Lindsey surface agreement, ask for a declaration of rights with respect to the Tyree mineral estate, and allege that PAL Oil's and UAE's activities relating to the Tyree mineral estate constituted fraud, slander of title, trespass, and conversion, and warranted punitive damages. Chesapeake also asserted an interest in the Tyree mineral estate and intervened in the Lindseys' declaratory action. Hereafter, we will refer to the Estill Circuit Court action as "the Lindsey litigation."
Incidentally, one of the defenses asserted by PAL Oil (represented by Combs) in the Lindsey litigation was:
(Emphasis added.)
The "T.W. Tyree lease recorded in Deed Book 33, Page 252, Estill County," is, as this Court has repeatedly observed, the original January 17, 1915 oil and gas lease between Thornton (T.W.) Tyree and Mary Alice Tyree, as Lessors and George B. Williams and C.R. Dulin. In other words, PAL Oil defended against the Lindseys' claims by representing to the Estill Circuit Court that it had assigned UAE an oil and gas lease granted by the owners of the Tyree mineral estate. When Combs was questioned about his choice to add this defense to PAL Oil's answer, he testified that he probably should have amended that defense to reflect that PAL Oil had utilized the "abandoned well process" to transfer ownership of wells 41 and 42 to UAE. But, he acknowledged that he never amended the answer.
In any event, the Estill Circuit Court held that the Lindseys, rather than Chesapeake, were the lawful owners of the Tyree mineral estate. This ruling was never appealed because UAE instead chose to settle with the Lindseys and Chesapeake. The relevant terms of their settlement, which the Lindseys, UAE, and Chesapeake entered in August, 2009, provided:
For its part, PAL Oil entered into the following agreement with the Lindseys:
Thereafter, between December, 2009, and January, 2010, all claims asserted in the Lindsey litigation were dismissed with prejudice.
Following the bench trial in this matter, the circuit court found that the appellants had collectively defrauded UAE through making several misrepresentations designed to induce UAE into believing that they were assigning UAE an oil and gas lease they had acquired from the owner of the Tyree mineral estate. The circuit court determined that PAL Oil had breached the 2006 APA by failing to transfer to UAE the Tyree mineral lease and an enforceable division order free and clear of all adverse claims. The circuit court also held Ledford and Arthur liable for PAL Oil's breach by virtue of their respective personal guarantees of the 2006 APA.
The appellants argue that each of the circuit court's determinations is erroneous. Each of these overarching issues is discussed below, along with the particulars of the appellants' arguments.
Before we review the substance of the circuit court's determinations respecting fraud by misrepresentation and omission, the appellants raise two procedural arguments.
First, the appellants argue that UAE's various claims of fraud should be dismissed because UAE's descriptions of their purported fraud in its complaint were not sufficiently definite. However, the appellants waived this argument because they never filed a CR
Second, the appellants argue that the trial court was not authorized to hold Arrowhead, Ledford, Parks and Arthur liable for fraud, as it relates to the Tyree mineral estate, because UAE's complaint only asserts that PAL Oil's actions defrauded UAE in this respect. Nevertheless, the evidence produced in this matter demonstrates that Ledford, Parks, and Arthur each played varying roles in assisting PAL Oil in its endeavor to sell UAE its "interest" in the Tyree mineral estate, and Ledford used Arrowhead's letterhead to convey information about the Tyree mineral estate to Van Bever, UAE's attorney. CR 15.02 allows any party, either before or after a judgment, to seek leave from a circuit court to amend their pleadings to conform to the evidence, and "failure so to amend does not affect the result of the trial of these issues." Here, Arrowhead, Ledford, Parks, and Arthur were joined as parties before the circuit court; the issue of fraud was tried as if it had been raised to impose liability upon each of them. Kentucky precedent supports that it was proper for the circuit court to treat UAE's claims of fraud as though they had been amended to include Arrowhead, Ledford, Parks, and Arthur. See, e.g., Com., Dep't of Hwys. v. Back, 391 S.W.2d 707 (Ky. 1965).
Moreover, CR 15.02 does not specify how a party must move to amend its pleadings to conform to the evidence. The appellants themselves point out in their briefs that the circuit court simply signed an order and judgment in this matter prepared entirely by UAE. That order and judgment, in turn, contains each of the circuit court's specific findings of fraud against Arrowhead, PAL Oil, Ledford, Parks, and Arthur. The circuit court also denied the appellants' subsequent motion to amend or vacate these findings. We hold that sufficient for the purpose of a CR 15.02 motion.
We now turn to the substance of the circuit court's findings against the appellants with respect to fraud by misrepresentation and omission. In a Kentucky action for fraud by misrepresentation, the party claiming harm must establish six elements of fraud by clear and convincing evidence as follows: a) material representation b) which is false c) known to be false or made recklessly d) made with inducement to be acted upon e) acted in reliance thereon and f) causing injury. United Parcel Service Co. v. Rickert, 996 S.W.2d 464, 468 (Ky. 1999); see also Wahba v. Don Corlett Motors, Inc., 573 S.W.2d 357, 359 (Ky. App. 1978).
By contrast, a claim of fraud by omission is based upon a party's failure to disclose to another a fact that the party knows may justifiably induce the other to act or refrain from acting. See, e.g., Restatement (Second) of Torts § 551 (1976) (cited in the context of fraudulent omissions in Giddings & Lewis, Inc. v. Industrial Risk Insurers, 348 S.W.3d 729, 747 (Ky. 2011)). In this regard,
Rivermont Inn, Inc. v. Bass Hotels & Resorts, Inc., 113 S.W.3d 636, 641 (Ky. App. 2003) (internal citations omitted).
Rickert, 996 S.W.2d at 468.
But, in no event will fraud ever be presumed, or sustained by mere suspicion, strained inference or conjecture. Hickman Bank & Trust Co. v. Pickard & Mayberry, 207 Ky. 772, 270 S.W. 30, 32 (1925).
With respect to its findings regarding fraudulent misrepresentations and fraudulent omissions, the circuit court framed the issue in this matter as whether the appellants intentionally misrepresented to UAE that they had and would convey to UAE an assignment of a mineral lease obtained from the Tyree mineral estate owner.
The first set of fraudulent misrepresentations identified by the circuit court consisted of Ledford's April 13 and 19, 2006 fax transmissions from Arrowhead to Van Bever. Inasmuch as this finding incorporated the division order contained in the April 19, 2006 fax, the record reflects that it is equally likely that Ledford or Southern Kentucky Purchasing drafted it. The evidence in this regard is only speculative; it is limited to Ledford's statement that he could not remember whether he drafted it, or if Southern Kentucky Purchasing issued it.
Moreover, Van Bever was the only representative of UAE to testify that he had an opportunity to review the contents of these faxes prior to when UAE entered the 2006 APA. He testified that he had no memory of relying upon these documents in drafting the 2006 PAL Oil-UAE APA.
The second set of misrepresentations cited by the circuit court consisted of the marketing prospectus for PAL Oil stating that it had the "T.W. Tyree lease," and that it was "for sale now." But, as mentioned previously, no evidence demonstrates that UAE ever received this marketing prospectus or relied upon it.
A third misrepresentation cited by the circuit court was Ledford's April 19, 2006 letter to Klinghoffer, stating that Arrowhead had "spent weeks in the court houses proving [its] validation of [its] leases, and even [UAE's] attorney here in Lexington, has agreed that we could close on this deal as early as Friday, if you would let him draw up documents[.]" But, as noted previously, Klinghoffer never testified in this matter. Accordingly, there is no record evidence that
Klinghoffer actually received or read the letter, relayed the contents of the letter to anyone else at UAE or that he placed any value upon it. The record is simply silent on whether the mere existence of the letter had any impact on the deal. And, Brian Gordon, who ultimately authorized UAE's purchase of assets from PAL Oil on April 28, 2006, testified that this transaction rapidly progressed simply due to "business purposes."
Indeed, only Klinghoffer's self-generated investment proposal to Madison Capital provides any insight into why UAE believed that PAL Oil was selling it a Tyree mineral lease from the Tyree mineral owner. No evidence in this record demonstrates that the appellants ever represented anything to Klinghoffer to that effect.
There being no evidence or testimony that the appellants actually represented to UAE that they owned the actual Tyree mineral lease, the evidence appears uncontradicted that the appellants did indeed make a representation to UAE both prior to and at the closing of the 2006 APA: the appellants conveyed to UAE some kind of right to explore for oil on the Tyree mineral estate under the abandoned well process theory. Although the appellants' testimony was that they believed the alleged abandoned well process gave them some type of interest in the oil wells at issue, the appellants could not have conveyed a lease to UAE because they never had a lease with the Tyree mineral estate owner or his representative. Therefore, rather than conveying UAE the right to explore the Tyree mineral estate for oil, in essence under the law, the appellants conveyed, at best, an invitation for UAE to be considered an innocent trespasser rather than a bad faith trespasser. See, e.g., Meece v. Feldman Lumber Co., 290 S.W.3d 631, 632-3 (Ky. 2009):
(citing Swiss Oil Corp., et al. v. Hupp, 253 Ky. 552, 69 S.W.2d 1037, 1041-42 (1934).)
Rather than recognizing "the abandoned well process" as a misrepresentation, however, the trial court appears to have interpreted it as a defense raised by the appellants. In regard to the "abandoned well process," the circuit court's final order states only the following:
The way that Combs and the appellants described it, however, using the "abandoned well process" resulted in an interest in a mineral estate separate and distinct from the interest attained in a lease with the owner of a mineral estate. Thus, aside from what Combs and the appellants testified was an initial burden of demonstrating to the Division that the mineral estate owner's identity was unknown, Combs and the appellants testified that, as they understood it, the "abandoned well interest" simply had nothing to do with a lease obtained from a mineral owner. Moreover, the appellants were indeed able to secure permits from the Division of Oil and Gas Conservation by doing exactly what they did; and, according to their abandoned well process theory, valid or not, it was the permits that gave them the right to explore for oil on the Tyree mineral estate, rather than a lease from the Tyree mineral estate owner.
It is the intention of the misrepresenting or omitting party that constitutes the fraud. Liability for fraud attaches to the appellants only if the evidence clearly and convincingly demonstrates that the appellants either knew that what they were representing to UAE was false, or that they represented it recklessly. United Parcel Service Co. v. Rickert, 996 S.W.2d 464, 468 (Ky. 1999). Stated differently, fraud requires a clear and convincing showing of "actual malice." See, e.g., E. W. Scripps Co. v. Cholmondelay, 569 S.W.2d 700, 704 (Ky. App. 1978) (defining "actual malice" as "knowledge of falsity or reckless disregard for the truth.").
"Malice can be inferred from the fact of . . . falsity." Stringer v. Wal-Mart Stores, Inc., 151 S.W.3d 781, 799 (Ky. 2004) (citing Thompson v. Bridges, 209 Ky. 710, 273 S.W. 529, 531 (1925)). Nevertheless, a finding of malice or bad faith may be negated if the evidence demonstrates that a person who made the material misrepresentation or omission did so as a consequence of reasonably relying upon the advice and guidance of a competent attorney.
During six litigious years, it appears no one questioned whether the "abandoned well process" had any basis in the law; rather, the attorneys in this case either treated it as if it were a valid legal doctrine without further investigation, or simply tried to ignore it. So far as we are aware, the Estill Circuit Court never had an opportunity to address the legalities of "the abandoned well process" in the Lindsey litigation because UAE chose to settle it. The Fayette Circuit Court, in its findings of fact and conclusion of law, did not consider Combs' advice to the appellants in its analysis of UAE's claim of fraud, or address the legal veracity of the "abandoned well process" in any of its orders. Indeed, when UAE attempted to question Combs about the legal underpinnings of the "abandoned well process" and contrast them with KRS 353.464 (and the several other unknown mineral heir statutes discussed earlier in this opinion) during the trial of this matter, the Fayette Circuit Court precluded UAE from doing so after sustaining a "relevance" objection from the appellants' counsel.
Moreover, it is evident from the appellants' counsels' "relevance" objection; the testimony their counsel sought to elicit from the appellants (see especially the "advantages" of the abandoned well process discussed by Ledford earlier in this opinion); the arguments posed in the appellants' two briefs submitted in this appeal (discussed further below); and the bare fact that the appellants' own attorneys never questioned the legal veracity of the "abandoned well process" over the course of approximately six years of litigation, that the appellants' past and present attorneys also believed—and continue to believe—that "the abandoned well process" bears legal veracity.
There is a factual issue regarding whether the appellants had the requisite intent necessary to prove fraud because the record provides evidence supporting that the appellants relied upon Combs' advice regarding the "abandoned well process" over the entire course of this matter. Ledford testified that prior to taking any action relating to the Tyree mineral estate, he and the other appellants sought Combs' advice with respect to how they could "acquire" wells on the Tyree property without knowing the identity of the Tyree mineral estate owner. Combs responded to their questions by telling them about "the abandoned well clause." The appellants all regarded Combs as competent, and Combs himself testified that he had approximately forty years of experience in mineral law and was the appellants' longstanding attorney. Prior to selling UAE their "abandoned well interest," the appellants explained what they understood about it to Combs. Combs endorsed "the abandoned well process," represented it to UAE as the law of Kentucky and represented the appellants in the closing of the sale.
Moreover, some evidence supports that the appellants followed Combs' advice or otherwise relied upon Combs in the context of every other instance cited by the circuit court as some form of fraudulent misrepresentation or omission in this matter.
The circuit court pointed to the fact that the appellants omitted telling UAE about Dean's August 18, 2006 cease-and-desist letter and their subsequent communications with Dean. But, Parks and Combs both testified that the appellants were relying upon Combs to do what needed to be done about that matter. And, in handling it, Combs testified that he believed it was acceptable not to inform UAE about his conversation with Dean and to instead assume that Dean would simply contact UAE on his own. This appears to be the impression he left upon the appellants as well.
The circuit court pointed to the fact that the appellants executed the 2007 amended assignment as evidence that they intended to assign an oil and gas lease from the Tyree mineral estate owner to UAE as part of the 2006 APA. Yet, Combs himself testified that when he received the 2007 amended assignment from Rhorer and immediately re-faxed it to the appellants without either reading it or advising his clients about it, he knew that the appellants only believed that they had an "abandoned well interest" in the Tyree mineral estate. And, the cover of Ledford's fax transmission to Rhorer, along with Ledford's and Parks' trial testimony, provides some evidence that the appellants believed that Combs approved of the amendment, and that the amendment therefore reflected what they believed. As noted previously, Ledford's cover letter to his fax transmission to Rhorer provided:
(Emphasis added.)
UAE also cites to the fact that the appellants' answer in the Lindsey litigation apparently admitted that the appellants intended to assign it a lease from the owner of the Tyree mineral estate. But, to the extent that the answer filed by the appellants in that settled matter could have any evidentiary value here, it must be qualified because it was drafted by Combs. Combs testified in the trial of this matter that, had the Lindsey litigation not been settled, he would have changed that statement to reflect that the appellants had only assigned UAE wells 41 and 42 through the abandoned well process.
One of the appellants' several arguments of error relating to the circuit court's finding of fraud and breach of contract relating to the Tyree mineral estate was that Ledford's execution of the 2007 amended assignment was the result of Ledford's unilateral mistake, and that he believed that it was simply a "quit claim" of PAL Oil's abandoned well interest and assignment of the surface agreement. In our review of the record, the 2007 amended assignment is the first instance where the appellants represented to UAE that UAE had obtained a mineral lease, whether that is actually what they intended to represent or not, from the Tyree mineral owner through the 2006 PAL Oil-UAE APA.
Nevertheless, the circuit court overlooked that the appellants may have firmly believed in Combs' advice regarding the "abandoned well process" theory in executing the agreements in this matter. The circuit court simply determined that UAE's reliance upon the appellants' representations and warranties was "reasonable." In so doing, the circuit court overlooked that the evidence in this matter only demonstrates, prior to the 2007 amended assignment, that the appellants represented that UAE's interest in the Tyree mineral estate derived solely from the "abandoned well process," rather than a lease from the Tyree mineral estate owner. The circuit court was entitled to disregard any evidence it chose when it made it findings of fact in this matter. It was not authorized, however, to presume fraud, Hickman Bank & Trust Co., 270 S.W. at 32, or to otherwise excuse UAE, as the plaintiff, from proving its claim, see Purcell v. Michigan Fire & Marine Ins. Co. of Detroit, 295 Ky. 232, 173 S.W.2d 134, 141 (1943), including whether UAE's reliance was reasonable given the facts of this matter.
Moreover, the circuit court overlooked that UAE had already begun operations on the Tyree mineral estate due to its belief that it had a mineral lease from the owner of the Tyree mineral estate prior to its receipt of Ledford's 2007 amended assignment, recalling that the 2006 PAL Oil-UAE APA did not include the Tyree lease. The circuit court overlooked that UAE never saw or asked to see any proof of ownership of a Tyree mineral lease from the mineral owner, or assignment of such a lease, naming PAL oil as a lessee or assignee; nor, for that matter, was there a listing of such in the 2006 PAL Oil-UAE APA. The circuit court overlooked that UAE, in spite of the foregoing, cited the 2007 amended assignment as its excuse for ignoring both the Lindseys' claim of title to the Tyree mineral estate and its own contradictory title opinion, which it received at nearly the same time it asked the appellants to execute the 2007 amended assignment.
The appellants' claims of mistake relating to Ledford's execution of the 2007 amended assignment sufficiently raised the appellants' reliance upon Combs' "abandoned well process" advice as a factor that the circuit court should have considered in its analysis of UAE's fraud claim.
We also recognize that a circuit court's determination of "reasonable reliance" in the context of fraud is often fact-intensive. But, if these factors are indeed supported by evidence located somewhere within in the thirty-two volumes of record, hundreds of exhibits and trial testimony, the circuit court failed to mention this evidence in its opinion. Moreover, it did not consider the impact of the merger clause UAE included in its agreement with PAL Oil on UAE's claim of fraud.
We sit as a court of review. In our review, it appears that the parties and the circuit court made several presumptions, overlooked several critical issues and omitted several critical steps in their analyses of fraud relating to the Tyree mineral estate. An appellate court may affirm a lower court's decision on other grounds as long as the lower court reached the correct result. See, e.g., McCloud v. Commonwealth, 286 S.W.3d 780, 786 n. 19 (Ky. 2009). But, a determination of whether UAE reasonably relied upon Ledford's 2007 amended assignment, and a consideration of Combs' advice to the appellants in the context of the "malice" factor of fraud, necessarily require additional findings of fact. Thus, prudence dictates that we reverse the circuit court's finding of fraud against the appellants, along with its related award of punitive damages, and remand this matter to allow the circuit court to revisit these issues, and take additional evidence regarding these issues.
To be clear, we are instructing the circuit court to do the following on remand:
1. Determine, regarding the intent element of fraud and in light of the evidence, whether the appellants reasonably relied upon the advice of their counsel, i.e., Combs' advice regarding the "abandoned well process," when they executed the 2007 amended assignment.
2. Determine, in light of the evidence, whether UAE reasonably relied upon the 2007 amended assignment to justify its belief that it owned an assignment of an oil and gas lease from the mineral owner of the Tyree mineral estate, when at the same time UAE was on notice that there existed doubts as to whether the appellants owned the Tyree lease.
3. If the circuit court determines that the record supports UAE's claim of fraud, the circuit court shall reevaluate its award of damages relating to fraud, and its apportionment of those damages against each respective appellant, consistently with the evidence presented in this matter.
As noted, the circuit court also determined that PAL Oil breached the 2006 APA by failing to transfer to UAE the Tyree mineral lease and an enforceable division order free and clear of all adverse claims. The circuit court also held Ledford and Arthur liable for PAL Oil's breach by virtue of their respective personal guarantees of the 2006 APA.
On appeal, PAL Oil contends that the only document supplying the basis for its breach of the 2006 APA is the 2007 amended assignment and that the 2007 amended assignment should not have supplied such a basis because all of the parties to this litigation executed it due to a mutual mistake.
Similarly, Ledford and Arthur argue that the circuit court erred in holding them liable for indemnifying UAE for its costs associated with obtaining a valid Tyree mineral lease and otherwise settling the Lindsey litigation. In particular, Ledford and Arthur argue they are not liable for indemnifying UAE because the 2007 amended assignment does not conform to KRS 371.065, Kentucky's guaranty statute, and because the 2006 APA—which they admit they did guarantee—only provided for a sale of PAL Oil's "abandoned well interest," rather than an oil and gas lease from the owner of the Tyree mineral estate.
As we have discussed throughout this opinion, however, PAL Oil purported to convey UAE the right to explore for oil on the Tyree mineral estate as part of the 2006 APA. And, regardless of whether PAL Oil believed this right came from the Division of Oil and Gas Conservation or the Tyree mineral estate owner, UAE clearly understood that it would receive this right from PAL Oil as a consequence of the 2006 APA. To use yet another automobile analogy, PAL Oil is essentially arguing: "Back in 2006, everyone knew I was selling UAE an automobile. It wasn't until September of 2007 that anyone believed that I had sold UAE a car instead." And, regardless of how PAL Oil chose to label or consider the right to explore for oil in the Tyree mineral estate, PAL Oil conveyed no such right to UAE.
In short, the circuit court correctly refused to allow PAL Oil to rescind the amended assignment on the basis of mutual mistake, correctly held PAL Oil liable to UAE for breaching their contract, and correctly held Ledford and Arthur liable for indemnifying UAE. All of the parties understood that PAL Oil was conveying UAE the right to explore for oil on the Tyree mineral estate as part of the 2006 APA; this included Ledford and Arthur, who guaranteed the 2006 APA when it was executed. It would have been a pointless gesture for the circuit court to have rescinded the 2007 amended assignment—along with any guaranty from Ledford or Arthur included therein—because the amended assignment merely gave a different name to that same right to explore; PAL Oil had already obligated itself to convey that right to UAE when it originally executed the 2006 APA; and, PAL Oil was already in breach of that obligation before it executed the 2007 amended assignment.
At the conclusion of this litigation (including UAE's "expired lease claims discussed more fully below), the circuit court awarded UAE a total of $1,521,597.30 in damages, $300,000 of which represented punitive damages. Part of this figure represented damages awarded for PAL Oil's breach of the 2006 APA and Ledford's and Arthur's indemnity liability to UAE with respect to the Tyree property. In that respect, the circuit court held:
With respect to what the circuit court cited as the appellants' collective fraud against UAE relating to the Tyree property, the circuit court essentially restated the amounts it had already awarded UAE for breach of contract and indemnity:
In a footnote, the circuit court's judgment also explains that in restating the same judgment twice, it was not doubling UAE's award of compensatory damages relating to the Tyree property; it was simply using UAE's fraud claim as a basis for making additional parties liable for paying varying percentages of the $858,900.69 in compensatory damages:
In reversing the circuit court's finding of fraud and remanding it for further consideration, we need not address the award of the additional $300,000 in punitive damages based upon the fraud, or the circuit court's assignment of specific percentages of liability to specific appellants relating to the punitive and compensatory damages awards relating to fraud, or the propriety of the circuit court's decision to add Parks and Arrowhead as liable parties. Furthermore, in the current absence of any finding of fraud, additional provisions of the 2006 PAL Oil-UAE APA come into play. For example, Section 15.1 provides:
In the absence of the necessary additional findings of fraud we have directed the circuit court to make upon remand, we cannot review the propriety of any specific measure of damages relating to the Tyree mineral estate. Therefore, upon remand, the circuit court shall also review this matter subject to its additional findings.
PAL Oil, Ledford, and Arthur argue that the circuit court erred with respect to excluding and admitting certain evidence in this matter. The extent of their argument is as follows:
The general rule is that relevant evidence
CR 61.01.
Although it was excluded, the appellants made an offer of Dean's testimony by way of affidavit. See, e.g., KRE 103(a)(2). Dean's affidavit provides that one-fifth of the lump sum UAE paid to the Lindseys represented the Lindseys' lost oil royalties, four-fifths represented "surface damage," and that the amounts the Lindseys had claimed for "surface damage" solely related to actions that UAE had taken on the Tyree property that were "inconsistent with any mineral estate lessees [sic] obligations to preserve the surface estate in a workmanlike manner." Dean's affidavit further describes examples of this surface damage. Thus, taken at face value, the appellants sought to call Dean to elicit 1) a legal interpretation of the UAE-Lindsey-Chesapeake settlement; and 2) a legal conclusion regarding whether UAE's conduct on the Tyree property exceeded the conduct to be expected from a reasonable mineral lessee.
With that said, the circuit court did not abuse its discretion in excluding Dean's testimony. It is clear that the appellants called Mike Dean to testify in his capacity as the Lindseys' attorney, rather than in his capacity as the managing member of Big Sinking Oil. While the UAE-Lindsey-Chesapeake settlement specified that Dean was the only attorney entitled to an attorney's fee in the Lindsey litigation, it appears that Big Sinking Oil made no claim for relief in that matter. Insofar as UAE's contract claims against PAL Oil, Ledford, and Arthur are concerned, the opinion of an attorney as to the legal effect, interpretation, and consequence of a document is not admissible. See 32 C.J.S. Evidence § 546(86); 31A Am. Jur. 2d Expert and Opinion Evidence § 357; General Elec. Co. v. Cain, 236 S.W.3d 579, 585 (Ky. 2007); see also 2A C.J.S. Affidavits § 39 (2006) ("It is improper for affidavits to embody legal arguments, and legal arguments and summations in affidavits will be disregarded by the courts."). Moreover, as it relates to this matter as a whole, it is unclear how Dean intended to "clarify" his own clients' testimony. But, given that Dean's only connection to this matter was as the Lindseys' attorney, whatever questions the appellants sought to ask Dean should have been asked to the Lindseys.
We decline to address the remainder of the appellants' contentions of error regarding the circuit court's decisions to exclude or admit evidence (i.e., the circuit court's introduction of redacted exhibits and what they assert was its abuse of discretion in "not compelling production of the documents UAE claimed were privileged and not reviewing the redactions in camera prior to trial"). At best, these contentions do not demonstrate anything more than harmless error and, in any event, they are too vague to be considered "arguments" within the meaning of CR 76.12(4)(c)(v). See Cherry v. Augustus, 245 S.W.3d 766, 781 (Ky. App. 2006).
Arrowhead, which is owned by Ledford and Arthur, executed contracts with UAE contemporaneously with, and identical to, the PAL Oil-UAE 2006 and 2007 APAs. As part of the 2006 Arrowhead-UAE APA, Arrowhead sold UAE two oil and gas leases, known respectively as the "John and Patsy Marcum Lease" and the "Sally Stewart Lease." As part of the 2007 Arrowhead-UAE APA, Arrowhead sold UAE two other oil and gas leases, known as the "Mitchell Goff Lease" and the "Simp Horn Lease." Ledford and Arthur personally guaranteed both of these APAs. In addition, while no evidence in this matter demonstrated that Parks owned any interest in Arrowhead, he also personally guaranteed the 2007 Arrowhead-UAE APA.
Shortly after UAE began having its difficulties with the Tyree mineral estate, UAE began to scrutinize the other interests it had purchased from the appellants. Upon scrutinizing the four leases just mentioned, UAE came to believe that each of those four leases had expired as a matter of law prior to when it purchased them from Arrowhead and that they were therefore worthless. UAE then determined that its best course of action would be to not attempt any oil exploration activities on any of the properties described in these leases.
After discovering that UAE had not attempted any oil exploration activities on any of the properties described in these leases, Arrowhead came to believe that UAE had, as a matter of law, abandoned each of these leases and that these leases were no longer valid as a consequence. Having arrived at this conclusion, Arrowhead then declared UAE in breach of Section 18.17(a) of both the 2006 and 2007 APAs, which provides:
Arrowhead sued UAE for breach of contract and demanded the fair market value of these four leases, pursuant to the above provision.
The question thus became: Who breached first? To answer this question, the circuit court was required to determine 1) whether these four leases were still valid; and, if they were no longer valid, 2) when they became invalid, e.g., had they been abandoned by UAE, or had they already expired when UAE purchased them? To make these determinations, the circuit court treated this matter as an action for a declaration of rights. This was proper. See, e.g., Walter v. Ashland Oil & Refining Co., 300 Ky. 43, 187 S.W.2d 425 (1945) (providing that a declaratory action is a vehicle for determining rights and interests of parties under an oil and gas lease).
Despite Arrowhead's objection, however, the circuit court did not require any of the lessors to be joined as parties to this action when it conducted the declaratory actions respecting each of these four leases. And, the circuit court proceeded to declare the rights of these nonparty lessors—along with Arrowhead, Ledford, Parks, Arthur, and UAE—when it eventually determined that these four leases were invalid and had expired. Thereafter, the circuit court dismissed Arrowhead's claims and found Arrowhead in breach of its contracts with UAE. It held Arrowhead, Ledford, and Arthur jointly and severally liable for $130,000 relating to the 2006 APA, and held Arrowhead, Ledford, Parks, and Arthur jointly and severally liable for an additional award of $185,000 relating to the 2007 APA.
On appeal, Arrowhead argues that the circuit court erred by failing to join the lessors to this action prior to adjudicating the several declaratory actions relating to the four above-referenced leases. We agree. KRS 418.075 provides in relevant part: "When declaratory relief is sought, all persons shall be made parties who have or claim any interest which would be affected by the declaration[.]" (Emphasis added.) Clearly, the lessors had an interest affected by the circuit court's declaration of rights; it is clear that the circuit court's ultimate decision in this matter could not be binding upon any of them; and, therefore, the lower court should have declined to declare the rights of those who were parties to this action, (i.e, Arrowhead, Ledford, Parks, Arthur, and UAE) until those nonparty lessors were joined. See Herbert C. Heller & Co. v. Hunt Forbes Const. Co, 222 Ky. 564, 1 S.W.2d 970 (1928). Consequently, we reverse these respects of the circuit court's judgment, and remand this matter for the circuit court to allow the parties leave to join any property owners whose interests may be affected. Unless such persons are made parties, the circuit court shall dismiss, without prejudice, Arrowhead's and UAE's respective claims of breach of contract against one another. Id.; see also KRS 418.065.
On July 8, 2009, the circuit court entered partial summary judgment in favor of UAE on UAE's claim of indemnity against Arrowhead, Ledford, Parks, and Arthur regarding the "Henderson" lease, which is one of the oil and gas leases UAE purchased from Arrowhead through the 2007 Arrowhead-UAE APA. Its order was entered in response to cross-motions for summary judgment submitted by each of these parties. The circuit court prefaced its order by stating that UAE's indemnity claim related to "losses and liabilities that arose in litigation concerning adverse claims" against this lease; that the parties had agreed that there were no factual issues regarding this lease; and, that UAE's entitlement to indemnity from these appellants depended solely upon the interpretation of the 2007 Arrowhead-UAE APA. The facts surrounding the Henderson lease were described by the circuit court, in relevant part, as follows:
Thereafter, the circuit court related these facts to the language of the 2007 Arrowhead-UAE APA. In relevant part, it held:
Ultimately, the circuit court awarded UAE $500 for the price UAE paid to Forest Oil in exchange for Forest Oil's quitclaimed interest in the Henderson mineral estate. The circuit court also awarded UAE $47,196.61 for UAE's attorney's fees incurred in litigating both the Henderson lease and in litigating an unrelated matter involving the "Gladys Marcum" lease (another lease that Arrowhead had sold UAE in the 2007 Arrowhead-UAE APA). The circuit court did not delineate which part of this latter award of attorney's fees represented the Henderson or Marcum litigation.
Arrowhead, Ledford, Parks, and Arthur raised no objection to the amount of attorney's fees that the circuit court awarded to UAE, nor to how the circuit court calculated it. Rather, prior to when the circuit court entered its judgment these appellants argued that two provisions of the 2007 Arrowhead-UAE APA operated to either completely or partially bar UAE from recovering this amount.
First, these appellants pointed to Section 15.1(b)(ii). In relevant part, that part of the agreement provides:
Arrowhead, Ledford, Parks and Arthur conceded that attorney's fees and settlement amounts incurred by UAE in resolving the Henderson and Marcum matters qualified as "Damages"
Arrowhead, Ledford, Parks, and Arthur contend that the circuit court erred in this respect, and we agree. Section 15.1(b) clearly and unambiguously provides that "all claims by Buyer for indemnification under Section 15.1 shall be limited[.]" (Emphasis added.) Here, UAE made two separate claims for indemnity reflected in this part of the circuit court's award: one relating to the Marcum lease, and one relating to the Henderson lease. Section 15.1(b)(ii) further provides how all claims shall be limited. The circuit court aggregated UAE's claims relating to the Marcum and Henderson leases because it mistakenly read Section 15.1(b)(ii) in a vacuum; it placed undue emphasis upon the phrase, "Damages in total," while ignoring the plain language of Section 15.1(b). Therefore, a further reduction of $10,000 to this award is warranted.
Arrowhead, Ledford, Parks, and Arthur also pointed to another provision of the 2007 Arrowhead-UAE APA as a defense to UAE's claim of indemnity, prior to when the circuit court entered its judgment. This latter provision, which they argued was a complete bar to UAE's recovery of any indemnity with respect to the Henderson lease, is entitled "Section 15.3
In relevant part, Section 15.3(a) provides:
Giving UAE the benefit of the doubt, we will assume that when UAE discovered what it believed was Forest Oil's interest in the Henderson lease, its discovery constituted "a claim or demand made by any person [Forest Oil] against the Indemnified Party [UAE]" (e.g., a "Third Party Claim"). If UAE wanted indemnity from Arrowhead relating to this "Third Party Claim," this provision required UAE to do the following: 1) Notify Arrowhead "in reasonable detail" regarding Forest Oil's claim; 2) do so "promptly" or "within ten (10) business days after" UAE made this discovery; and, 3) provide Arrowhead "with copies of any material in its possession describing the facts or the basis of the Third Party Claim or containing any other information relevant thereto." If UAE failed to do so, its potential indemnity would be reduced in proportion to the extent that its failure prejudiced Arrowhead, or Arrowhead's ability to defend or resolve the Third Party Claim. Moreover, if UAE failed to notify Arrowhead as described above, its failure would exonerate Arrowhead from any liability for paying UAE's attorney's fees and other expenses in resolving the Third Party Claim.
Next, we consider Section 15.3(b):
Like Section 15.3(a), part (b) also emphasizes that Arrowhead, as the "Indemnifying Party," would have the right to participate in and direct any defense or prosecution of a Third Party Claim. It provides that if Arrowhead chooses to direct the defense or prosecution of the Third Party Claim, it would not be liable for UAE's subsequent attorney's fees and litigation expenses. It also provides that that if UAE, as the "Indemnified Party," chooses to litigate the Third Party Claim prior to giving Arrowhead the "notice" previously described, Arrowhead would not be liable for UAE's resulting attorney's fees and expenses. It emphasizes again that Arrowhead and UAE are to cooperate in defending any Third Party Claim. It emphasizes that the definition of the word "cooperate" includes "provid[ing] additional information and explanation of any material provided hereunder or otherwise relating to the Third Party Claim." Finally, it mandates that Arrowhead's liability for indemnifying UAE in relation to any Third Party Claim is contingent upon Arrowhead's "prior written consent" to any settlement, compromise, or discharge.
Finally, Section 15.3(c) once again underscores the necessity of cooperation:
Oil's Third Party Claim, beginning with how UAE gave Arrowhead "notice" of this claim. UAE appraised itself of what it believed was Forest Oil's half-interest in the Henderson lease on or about December 10, 2007; the record contains a title opinion to that effect, produced by UAE, bearing that date. UAE asserts that it gave Arrowhead notice of Forest Oil's Third Party Claim by filing its complaint in this matter on December 27, 2007. And, in that regard, UAE's complaint provides only the following:
Below, Arrowhead, Ledford, Parks and Arthur asserted that UAE only informed them that it had been in the process of obtaining a one-half interest in the Henderson lease from Forest Oil on March 30, 2009, the date of UAE's motion for partial summary judgment in this matter relating to the Henderson lease. UAE did not deny this. They asserted that until March 30, 2009, UAE had objected to making any responses to their discovery requests with respect to UAE's allegations involving the Henderson lease. UAE did not deny this. On June 8, 2008, UAE filed its "Petition to Declare Trust" in Estill Circuit Court regarding the Henderson lease; the face of this petition reflects that it was served upon Forest Oil, but it omits any mention of Arrowhead. Arrowhead claimed that UAE never informed it about UAE's $500 settlement with Forest Oil in July, 2008, or gave it an opportunity to participate in that settlement, and there is nothing in the record to the contrary. Indeed, there is no indication that Arrowhead, or any of the appellants, knew about, consented to, or were even given the opportunity to cooperate with anything that UAE did regarding the Henderson lease.
Nevertheless, the circuit court determined that Section 15.3 and its subsections did not bar UAE's claim of indemnity relating to the Henderson lease for three reasons:
On appeal, Arrowhead, Ledford, Parks and Arthur argue that Section 15.3 should have acted as a bar to UAE's claim of indemnity relating to the Henderson lease. We agree.
The essential purpose of Section 15.3 was to give Arrowhead, as the indemnifying party, the first opportunity to cure any defects in what it had conveyed to UAE through their agreement. Arrowhead's contractual duty in this respect was not contingent upon what it knew or should have known—Section 15.3 contains no such language. In any event, the circuit court made no finding that any of the appellants should have been on constructive notice of Forest Oil's claim, or that any of the appellants' conduct relating to the Henderson lease amounted to fraud or bad faith.
It makes no difference whether UAE settled Forest Oil's claim for $500 or $500,000: Section 15.3(a) clearly and unambiguously provides that if Arrowhead's ability to resolve the Third Party Claim is utterly destroyed, so too is UAE's right to indemnity. It was error for the circuit court to award UAE any amount of indemnity relating to the Henderson lease.
The total damages awarded by the circuit court must be modified per our holding in this matter. Nevertheless, the appellants present two more issues with respect to the total amount of damages that the circuit court is entitled to award, whatever that total might be. These two issues regard 1) the extent of non-punitive damages that the circuit court may award in this matter; and 2) the circuit court's decision to award UAE its fees and costs associated with collecting its total judgment.
PAL Oil, Ledford, and Arthur assert that they should not be held liable to UAE for any damages beyond $872,000
To the extent that the appellants argue that Fratzke or Lafleur mandate a reduction in the amount of the total damages awarded to UAE, they misinterpret both cases. As explained in Thompson v. Sherwin Williams Co., Inc., 113 S.W.3d 140, 144 (Ky. 2003),
In short, Thompson explains that CR 8.01(2)—the Civil Rule described in Fratzke and LaFleur as the basis for limiting a total award—is concerned with the total amount of damages claimed, not with categories of damage. In seeking to isolate specific sums as "related to the 2006 APA," PAL Oil, Ledford, and Arthur have ignored this distinction and have, nevertheless, resorted to categorizing damages.
Moreover, CR 8.01(2) would not otherwise reduce UAE's award of damages. As UAE points out in its brief, the total amount of its damages between its claims relating to both the 2006 APA and 2007 APA (discussed more fully below) was $1,336,000. This is an amount in excess of the total amount of non-punitive damages that the circuit court awarded UAE.
The circuit court's judgment in this matter provides that UAE "is also awarded post-judgment interest accumulating at the statutory rate of twelve percent (12%) per annum until the date the Judgment is paid in full, plus attorneys' fees and costs incurred in collecting on this judgment." The appellants argue that the circuit court erred in granting UAE its "attorney's fees and costs incurred in collecting on this judgment.
Inasmuch as the appellants are arguing that post-judgment attorneys' fees are never warranted in breach of contract disputes, they are incorrect. In Moorhead v. Dodd, 265 S.W.3d 201 (Ky. 2008), the Kentucky Supreme Court held that the following contractual provision entitled a successful litigant to such fees:
The language of the various APAs at issue in this litigation contains equally broad language. Each APA specifies that if indemnity is warranted, that indemnity includes the recovery of "Damages." "Damages," in turn, is contractually defined as "all losses, damages, penalties, fines, judgments, costs, amounts paid in settlement, expenses and fees, including reasonable attorneys' and accountants' fees and expenses." Therefore, we agree that the various APAs in this matter entitled UAE to some measure of post-judgment attorneys' fees.
We find error, however, in the circuit court's phrasing of this award because it fails to provide any measure for those fees. If and when UAE files a post-judgment petition for attorneys' fees
We REVERSE the circuit court's determination of fraud, and REMAND for the circuit court to reconsider that matter and make additional findings consistent with this opinion.
We AFFIRM IN PART, REVERSE IN PART, and REMAND with respect to UAE's claim for contractual indemnity relating to the Tyree mineral estate. We AFFIRM the circuit court's determination that PAL Oil, Ledford, and Arthur are liable for indemnifying UAE, pursuant to the terms of the 2006 PAL Oil-UAE APA, for PAL Oil's failure to convey to UAE any valid right to explore for oil on the Tyree mineral estate. However, because the circuit court's calculation of UAE's award of damages relating to indemnity appears to be dependent upon and inseparable from an additional finding of fraud, we REVERSE and REMAND for the circuit court to reconsider the amount of UAE's indemnity award concurrently with its reconsideration of the appellants' liability for fraud.
We REVERSE each of the circuit court's determinations relating to the "expired" or "abandoned" leases, i.e., the "John and Patsy Marcum," "Sally Stewart," "Mitchell Goff," and "Simp Horn" leases, and REMAND these matters with directions for the circuit court to permit the parties to join any property owners whose interests may be affected by an adjudication of rights relating to those leases. Unless such persons are made parties, the circuit court shall dismiss, without prejudice, Arrowhead's and UAE's respective claims of breach of contract against one another relating to these leases.
We REVERSE the circuit court's award of indemnity to UAE relating to the Henderson lease. The circuit court shall VACATE any part of UAE's total award relating to that matter.
Furthermore, in the event that the circuit court determines, following its reconsideration of this matter, that UAE is entitled to collect any amount of prospective attorneys' fees from the appellants, the circuit court shall specify in its Judgment that any such fees shall be "reasonable."
LAMBERT, SENIOR JUDGE, CONCURS.
KELLER, JUDGE, CONCURS IN RESULT ONLY.
(Internal citations omitted.)
U.S. v. Van Allen, 524 F.3d 814, 823 (7th Cir. 2008) (citing United States v. Al-Shahin, 474 F.3d 941, 947-8 (7th Cir. 2007). "Advice of counsel" is also a defense used in bankruptcy proceedings to excuse or explain acts which otherwise bear indicia of fraud, assuming that all relevant information was in fact provided to the attorney. See, e.g., Palmer v. Downey (In re Downey), 242 B.R. 5, 15 (Bankr.D.Idaho.1999); Kaler v. McLaren (In re McLaren), 236 B.R. 882, 897 (Bankr. D. N. D.1999); Butler v. Ingle (In re Ingle), 70 B.R. 979, 984 (Bankr.E.D.N.C.1987); InterFirst Bank Greenville, N.A. v. Morris (In re Morris), 58 B.R. 422, (Bankr.N.D.Tex.1986); Comprehensive Accounting Corp. v. Morgan (In re Cycle Accounting Servs.), 43 B.R. 264, 269 n. 7 (Bankr.E.D.Tenn.1984).
