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GREENAN v. ERNST (10/05/62)

October 5, 1962

GREENAN, APPELLANT,
v.
ERNST, APPELLANT.



Appeals, Nos. 222 and 229, March T., 1961, from decree of Court of Common Pleas of McKean County, Oct. T., 1951, No. 1, in equity, in case of Grace Healey Greenan v. Florence E. Ernst, executrix of estate of William J. Healey, Manufacturers and Traders Trust Company of Buffalo, executor of estate of William J. Healey, et al. Decree, as modified, affirmed.

COUNSEL

Patrick H. Sullivan, with him John V. Thornton, Thomas McCarthy, William P. McVay, James F. McVay, and McVay and McVay, for plaintiff, appellant.

John C. Bane, Jr., with him Leonard L. Scheinholtz, John H. Scott, Jr., James D. Wolfe, James A. Deckop, of the New York Bar, and Reed, Smith, Shaw & McClay, for defendants.

Before Bell, C.j., Musmanno, Jones, Cohen, Eagen and O'brien, JJ.

Author: Jones

[ 408 Pa. Page 497]

OPINION BY MR. JUSTICE BENJAMIN R. JONES

In 1911 J. H. Healey, a resident of McKean County and a pioneer in the "Bradford oil and gas field" died. Under the terms of his will his residuary estate was divided into three parts: one part was given outright to his 39 year old son, W. J. Healey, one part was given outright to his 24 year old daughter, Grace Healey Greenan, and one part was set up in trust for his 32 year old son, Norman Healey,*fn1 for life and, upon his death, to W. J. Healey and Mrs. Greenan. W. J. Healey and one R. V. Hill were named trustees under the trust but Hill resigned in 1912 and, thereafter, W. J. Healey acted as the sole trustee.

Included in J. H. Healey's residuary estate were a fee-owned 20 acre tract of land and an oil lease of an 80 acre tract of land, both oil producing tracts being located near Bradford, Pa., the 80 acre tract being known as "Shepard Run". In his will, J. H. Healey requested his wife, children and trustees to continue the operation of his oil and gas business for a period of at least five or ten years.*fn2 Pursuant to that request, W. J. Healey, Mrs. Greenan and W. J. Healey, as trustee for Norman Healey, pooled their interests and in June, 1913 formed a partnership known as Healey Oil Company (Healey Oil) for the purpose of "operating and producing oil and gas". The partnership agreement, in pertinent part, provided: (a) W. J. Healey, Mrs. Greenan and the Norman Healey trust each would have a third interest in the partnership; (b) W. J. Healey was to manage the business "in a good and skillful manner" and for the first six months was to receive a salary of $60 per month at the end of which time the salary was to be readjusted by agreement of

[ 408 Pa. Page 498]

    the parties;*fn3 (c) the partnership was to drill new wells on property it presently owned as well as on after-acquired properties as the majority of the partners would agree; (d) W. J. Healey was to sell the oil produced except that Mrs. Greenan was to sell her proportion of the oil produced from the 20 acre tract; (e) by agreement of the parties the partnership might acquire other oil or gas properties. Nothing in this partnership agreement either expressly permitted or expressly prohibited the partners from engaging in the oil or gas business on their own.

The partnership went into active operation in 1913. In 1915, the partners sold the 20 acre tract for $6500 to one C. W. Moore. One month later, the same Moore sold to W. J. Healey, personally, an oil lease of property known as the Hunt property for $7500.*fn4 For his own account as an individual, W. J. Healey later purchased an interest in a so-called Van Scoy property (1919), a so-called Buchanan property (1926) and a so-called Forty-four property (1928), all being oil producing properties.

From 1915 through 1928, deposits were made in the Bradford National Bank in the following accounts: Healey - $1,320,730.40; Healey & Co. - $258,260.61; Healey, personal - $66,575.94; Norman Healey - $577.00; Healey Oil - $137,411.66.

On November 30, 1928, W. J. Healey, together with members of a Buffalo, N.Y. group, formed a Delaware corporation called Healey Petroleum Corporation (Healey Petroleum). This incorporation was preceded by the execution on November 19, 1928 of a contract

[ 408 Pa. Page 499]

    between W. J. Healey and one Ralph Hochstetter, the latter representing the Buffalo group. This contract provided: (a) W. J. Healey and Hochstetter were to join in "acquiring and developing by the water pressure method oil properties in the Bradford Field"; (b) for this purpose a corporation was to be organized with a capital of at least $2,000,000 of $100 par 7% cumulative dividend preferred stock plus two shares of no par common stock for each share of preferred stock sold; (c) each stock subscriber would purchase the stock in units, each unit consisting of one share of preferred stock and one share of common stock and, for each unit sold, W. J. Healey was to be given the second of the two shares of common stock; (d) the common stock was not to receive payment "by way of principal, or dividend" until every share of the preferred stock was retired at $110 (i.e., the par value of each share of preferred stock ( $100) and a premium ( $10)) plus full dividends cumulated at $7 per share per year;*fn5 (e) W. J. Healey would subscribe to one-quarter of the capital of the corporation within two years,*fn6 would serve as general manager and would turn over to the corporation any leases of undeveloped oil lands which he then had and all oil leases and oil producing land which he might after acquire; (f) W. J. Healey was to be permitted to operate the properties which he already had under development although the corporation might, within two years, if a price could be agreed upon, buy from W. J. Healey "all of his present operations." Upon formation of Healey Petroleum, the plan

[ 408 Pa. Page 500]

    was changed in that the amount of authorized preferred stock was raised from $2,000,000 to $5,000,000.*fn7

After organization of the corporation and, more specifically, on December 3, 1928, for the purpose of discharging his obligation to buy 5000 shares of the preferred stock and 10,000 shares of the common stock, W. J. Healey offered to sell to Healey Petroleum - Healey Petroleum accepted the offer - "all of [his] oil properties in McKean County" which he was then operating, "comprising 243 acres of real estate"*fn8 and, in exchange, to receive 5000 shares of the preferred stock ($500,000), 10,000 shares of common stock ($10,000) and $965,000 in cash or notes of Healey Petroleum, a total purchase price of $1,475,000. Pursuant to this offer and acceptance, W. J. Healey transferred his ownership of the Hunt, Van Scoy, Buchanan and Forty-four properties to Healey Petroleum. At W. J. Healey's solicitation, Mrs. Greenan transferred to him her interest in the Shepard Run property and W. J. Healey, as trustee under the Norman Healey trust, transferred the trust's interest in Shepard Run to himself. W. J. Healey then transferred Shepard Run to Healey Petroleum for a price which he told Mrs. Greenan was $120,000.

Fully supported by the evidence, the court below found that W. J. Healey failed to disclose to Mrs. Greenan the fact that Healey Petroleum was interested in the purchase of Shepard Run when he secured a

[ 408 Pa. Page 501]

    transfer of her interest therein to him, that he fraudulently misrepresented to her that the price for Shepard Run was $120,000 and that such price was a fair price, and that he paid both Mrs. Greenan and the Norman Healey trust $40,000 for each of their respective interests.*fn9 The records of Healey Petroleum, under the item "Investments", listed the Hunt, Van Scoy, Buchanan, Forty-four and Shepard Run properties at a valuation of $1,471,327.50,*fn10 a valuation almost equal to the consideration set forth in W. J. Healey's offer to Healey Petroleum for the exchange of the properties for the preferred, common stock and cash. On Healey Petroleum's records the Shepard Run property was carried at a valuation of $315,232.83. The record clearly reveals that the consideration for the transfer to Healey Petroleum of these five properties, was $1,475,000, in cash and stock, which W. J. Healey received.

Ultimately, Healey Petroleum secured subscriptions for 38,155 units of the preferred and common stock, each unit costing $102. Thereupon, in accordance with the terms of the contract of November 19, 1928 (whereunder Healey was to receive one share of common stock for each unit subscribed) Healey received 38,155 shares of the common stock; 37,155 shares were received on November 4, 1929 and 1,000 shares were received on December 2, 1930.

The court found deposits were made in the following accounts: in 1929, Healey - $1,854,268.20, Healey & Co. - $176,251.04 and Healey, Personal, $37,000.00; in 1930 and through 1935, Healey - ...


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