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March 19, 1963


Appeal, No. 186, March T., 1962, from judgments of Court of Common Pleas of Washington County, Nov. T., 1958, No. 112, in case of United Refining Company v. W. L. Jenkins, Jr. Judgments reversed.


Francis H. Patrono, with him Patrono and Edwards, for appellant.

Adolph L. Zeman, with him Robert L. Zeman, and Zeman & Zeman, for appellee.

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

Author: Jones

[ 410 Pa. Page 127]


In July, 1955, a Mr. and Mrs. Nesselson (Nesselsons) owned certain land and leasehold interests in

[ 410 Pa. Page 128]

    land in Bedford, Pa., and McKean County upon which land were oil wells. Nesselsons were then having financial difficulties. The People's National Bank & Trust Company (Bank) held a first mortgage against Nesselsons' interests upon which mortgage was owing $117,388.82, the United Refining Company (United) held a $5651.30 judgment and there were other judgments totaling $8262.31, all junior in lien to the Bank's mortgage. The Bank was then threatening a foreclosure of its mortgage.

Nesselsons interested W.L. Jenkins, Jr., (Jenkins), an accountant without experience in oil production, in purchasing their interests. Jenkins contacted United and the Bank about resetting their respective loans. According to Jenkins, United's president, a Mr. Logan, (now deceased) informed him that lack of finances prevented proper operation of Nesselsons' operations, that United bought and would continue to buy their oil, that an increase in the price of oil was anticipated and that United, not an oil producer, was not interested in taking over Nesselsons' operations. After viewing Nesselsons' properties, Jenkins approached the Bank about the possibility of refinancing its loan but the Bank was not then receptive. Jenkins so informed Logan and Logan promised to use his influence with the Bank. The Bank the became receptive to the possibility or refinancing the loan and eventually made a proposal to Jenkins under which Jenkins would post $40,000 in an escrow account for improvement of the properties. Jenkins could only provide from his own funds $25,000 but he secured the promise of United to advance the additional $15,000 when needed.

In outlining the course of negotiations between the parties, certain documentary evidence is enlightening. On December 8, 1955, the Bank agreed to refinance the Mortgage provided Jenkins place $50,000 for improvements of the properties in an escrow account and passing

[ 410 Pa. Page 129]

    to the Bank all the proceeds from the sale of oil to be used in paying the interest and principal on the mortgage and in operating costs. On December 19, the Bank modified its proposal by reducing the amount from $50,000 to $25,000 with the understanding that, when requested, Jenkins would deposit an additional $15,000. The Bank, on December 20, wrote United, enclosing a copy of its letter of December 19 to Jenkins, and requesting that United execute a letter stating that it would loan Jenkins $15,000 to be repaid after payment of the Bank's mortgage. On December 28 United wrote the Bank that the proposed letter was unacceptable inasmuch as it would not wait to be paid until the Bank's mortgage had been paid. On January 3, United wrote the Bank that it would loan $15,000 to Jenkins on a note "payable to [United's] order, and at a rate [to be agreed upon between United and Jenkins] which will not interfere in any way with his obligation or commitments under the mortgage loan at [the Bank] or with the orderly development of the property until January 1, 1958, after which definite monthly installments of $500 will be provided for to continue to the final liquidation of the note." (emphasis supplied). On January 5, the Bank wrote Jenkins outlining the terms upon which it would refinance the mortgage; that all proceeds from the oil properties would be assigned to the Bank; after January 1, 1958, 25% of the oil proceeds would be applied to the mortgage interest and principal but, if 25% was insufficient, then as much as necessary to pay on interest and principal; the remaining 75% (if not required) would be available for payment on United's loan to Jenkins and the balance held by the Bank as further security; after August 1, 1958, 10% of the oil proceeds was to be applied to payment of mortgage interest and principal if such was adequate for the purpose; that "... Beginning on January 1, 1958, $500 shall be available

[ 410 Pa. Page 130]

    monthly out of 75% of the oil runs for principal payments on your note to [United] ...."

United loaned $3,000 to Jenkins and received in return an unconditional $3,000 promissory note, dated June 18, 1956, payable to United's order and signed by Jenkins. On February 13, 1957, Jenkins wrote United requesting an additional $7,000 and enclosed a $10,000 promissory note (covering the original $3,000 and the additional $7,000) which note limited the recourse thereon to Jenkins' properties in McKean County. On February 20, United returned this note stating, inter alia: "However we have no particular objection to an additional $7,000 but we do object ob loaning it on a note which limits payment to money that you may eventually recover from the Nesselson property ... in all of our discussions it has been agreed that we were to loan you money on your own signature but this is the first time the question of advancing money against the property ...

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