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Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 

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UNITED STATES COURT OF APPEALS . p I L E D . Umtcd Srtte& Court c,f Appeals 

TENTH CIRCUIT Tenth Circuit 

TEXAS OIL & GAS CORP., 

a Delaware corporation, 

and TXO PRODUCTION CORP., 

a Delaware corporation, 

Plaintiffs, Appellees, 

Cross-Appellants, 

v. 

DONALD M. DURRE'l'T and 

JACQUELYN MARIE STEVENS, 

Defendants, 

HUBERT K. ELROD, 

Defendant, Counterclaimant, 

Appellant, Cross-Appellee, 

HELEN L. ELROD, 

Third-Party Plaintiff, 

Appellant, Cross-Appellee. 

TEXAS OIL & GAS CORP., 

a Delaware corporation, 

and TXO PRODUCTION CORP., 

a Delaware corporation, 

Plaintiffs-Appellants, 

v. 

DONALD M. DURRE'l'T and 

JACQUELYN MARIE STEVENS, 

Defendants-Appellees, 

HUBERT K. ELROD, 

Defendant, Counterclaimant, 

Appellee, 

HELEN L. ELROD, 

Third-Party Plaintiff, 

Appellee. 

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MAR 19 1991 

.ROBERT L. HOECKER 

Clerk 

Nos. 87-1315 and 87-1351 

(D.C. No. Civ-82-477-E) 

(W.D. Okla.) 

No. 87-1389 

(D.C. No. Civ-82-477-E) 

(W.D. Okla.) 

Appellate Case: 87-1351 Document: 010110031213 Date Filed: 03/19/1991 Page: 1 
ORDER AND JUDGMENT* 

Before HOLLOWAY, Chief Judge, SETH and SEYMOUR, Circuit Judges. 

These three appeals were consolidated for hearing and for 

disposition. In this opinion the issues will be considered 

without reference to the particular appeals. The briefs with the 

addendum are several thousand pages in length. The defendants 

Hubert K. Elrod and Mrs. Elrod filed notice of an appeal entered 

against them in the action brought by plaintiffs Texas Oil and Gas 

Corp. and TXO Production Corp. (hereinafter TXO). TXO crossappealed from this final judgment in its favor against the 

defendants Elrod but only insofar as it allowed a setoff against 

the judgment. TXO also appealed from the trial court's denial of 

its application for attorney fees. 

The liability issues raised by the complaint, and issues 

raised by the defendants on a counterclaim and by a third-party 

plaintiff were tried to a jury. The jury's determination was made 

by answers to special interrogatories. The matters as to the 

amount of the damages and setoffs were then submitted to a special 

master. Hearings were held by the special master, and he 

*This order and judgment has no precedential value and shall not 

be cited, or used by any court within the Tenth Circuit, except 

for purposes of establishing the doctrines of the law of the case, 

res judicata, or collateral estoppel. 10th Cir. R. 36.3. 

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submitted a report. The trial court adopted the recommended 

findings and conclusions of the special master, with some 

modifications. The court then entered judgment for TXO in the 

amount of $464,185.25 after setoffs and credits. After a hearing 

the court denied plaintiffs' motion for attorney fees. 

Plaintiffs brought suit for fraud and conspiracy to defraud 

against Hubert K. Elrod, an independent lease broker, and against 

Donald Durrett and Jacquelyn M. Stevens, who had been employees of 

TXO. Durrett was a company landman whose duty it was to acquire 

oil and gas leases and other mineral interests for TXO. Jacquelyn 

Stevens was a company records clerk for TXO. 

The fraud asserted was in the purchase by Durrett with TXO 

funds, but without its authority, of leases outside the areas in 

which Durrett was authorized to buy leases. The leases were 

initially acquired by defendant Elrod by agreement with Durrett, 

although Durrett could apparently have bought them directly for 

TXO. Durrett would then buy them from Elrod for TXO usually at 

about twice the price paid for them by Elrod, and the two would 

divide the profit (sometimes with a portion going to Stevens). 

Also, within areas in which Durrett was authorized to 

purchase, it was asserted that in buying them for TXO there was an 

agreement that these were first to be taken by Elrod and then 

assigned by Elrod to TXO at an increased price, usually double, 

with the three defendants dividing the increase. 

Also, interests in leases already held by TXO, it was 

alleged, were assigned in the name of TXO to third parties by 

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Durrett either directly or indirectly through Elrod. Elrod and 

Durrett would collect the sales price from the buyers by false 

representations that the money would go to TXO, but the three 

defendants kept the money themselves. 

The defendant Elrod denied the fraud described in the 

complaint. He also counterclaimed as to particular other 

transactions, asserting that TXO had engaged him to buy a group of 

leases but had not paid him when the drafts were presented to TXO. 

Elrod by the counterclaim sought to recover what he asserts TXO 

was to pay him for these leases. These leases are described 

hereinafter as the Kretchmar, Bass, and Spessard leases (KBS 

leases). 

The Elrod counterclaim also sought damages in connection with 

the operation by TXO of a well in which TXO and Elrod had a joint 

interest (the Mcclung well). TXO denied the assertions in the 

counterclaim. 

After the jury trial on the fraud issues the jury answered 

the special interrogatory as follows: 

"Do you find that Hubert Elrod conspired with 

Don Durrett and Jacquelyn Stevens to defraud 

the plaintiffs? 

"[Answer:] Yes." 

The record demonstrates that all the elements of fraud and a 

conspiracy to defraud had then been established by substantial 

evidence. This basic liability issue was submitted to the jury 

with proper instructions, and it answered the interrogatory as 

quoted above. 

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The jury also decided several issues raised on the 

counterclaim. It decided by its answer to interrogatories that 

TXO had "wrongfully refused" to pay the Elrods for the assignments 

of the KBS leases. It also decided that TXO had not accounted for 

the Elrods' interest in a particular well in which TXO and Elrod 

were joint owners of working interests - the Mcclung well operated 

by TXO. 

The special master considered at length the consequences of 

the basic fraud by defendants and also examined specific 

transactions, hereinafter described. 

The special master, as mentioned, prepared as his report an 

accounting among the parties based on the jury verdict as to the 

basic fraud with adjustments for specific transactions raised by 

the counterclaim. His findings and conclusions, with some 

modifications, were adopted by the trial court and judgment was 

entered for TXO after adjustments for specific transactions. 

After an evidentiary hearing, the trial court denied 

plaintiffs' motion for attorney fees, pursuant to Okla. Stat. tit. 

12, S 936 (1981) although the court acknowledged that TXO was the 

prevailing party, and that the requested fees were reasonable. 

The Fraud Issue 

The proof admitted at trial demonstrates that the conspiracy 

inflated the prices TXO was paying for the leases acquired for it 

by Durrett through the conspiracy over what the conspiracy paid, 

followed by a division of the inflated portion among the 

conspirators. The conspirators were shown to be Durrett, the TXO 

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landman, Stevens, the TXO record clerk, and Elrod, the lease 

broker. It would serve no useful purpose to here describe the 

proof. The appellee Elrod does not seriously challenge the fact 

that the conspirators profited by the transactions. Instead, on 

appeal, appellee Elrod urges that TXO did not show that it was 

damaged thereby. However, it was demonstrated that TXO paid much 

more for the leases than it would have to have paid had Durrett 

bought them in accordance with the proper exercise of his duty as 

an employee of TXO. It is this proof of these amounts created by 

the fraud that the special master used in his computations. In 

our view, these were properly considered as "damages" caused 

directly by the acts of the conspirators, and recoverable under 

Oklahoma law. Under this record there is no issue of "implied" 

damages or "implied" fraud, as the defendants urge. There was no 

failure of proof. 

The defendants argue that TXO ratified the acts of the 

conspirators by retaining the leases and also by the approval by 

an employee of a draft of Elrod on March 23 after the fraud was 

discovered on March 19. Elrod on appeal argues that from a lease 

inventory TXO "could have assumed Elrod was splitting profits on 

lease sales to TXO with its employee Durrett." There is no basis 

for such an assumption to support a ratification argument, and we 

find none from the fact TXO initially retained the leases. 

We are fully satisfied that all the elements of the fraud 

alleged were supported by substantial evidence and submitted to 

the jury with proper instructions. It would serve no purpose to 

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Appellate Case: 87-1351 Document: 010110031213 Date Filed: 03/19/1991 Page: 6 
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make a detailed analysis. The trial court was correct in its 

denial of Elrod's motion to dismiss at the close of plaintiffs' 

case. 

The McClung Well 

As part of his counterclaim Elrod asserted that his interest 

in a certain well - the Mcclung well - had been eliminated by 

plaintiffs which also had an interest in the well and were the 

operators of the property. He further asserted that he was 

entitled to recover the value of his share of gas produced from 

the well. 

The jury found that Elrod was entitled to a ten percent 

working interest in the well, and that plaintiffs had 

"fraudulently deleted" the interest. 

The trial court determined that the parties be placed in the 

position that they would have been had the interest not been 

deleted. The special master made an accounting with the other 

working interest owners in the well as if the operating agreement 

with the other parties had been applied from the outset to Elrod's 

interest. TXO was the operator, as mentioned. Thus Elrod was 

entitled to credit for his share of all gas revenues ($117,656.58) 

which he had not received. But, since he had not paid any of his 

share of the drilling, completion and operating costs, that sum 

was due the "operator" - TXO ($158,096.55). 

Elrod and TXO were in the position of joint tenants of the 

leasehold working interest. TXO undertook the drilling and 

completion and produced the well as it had a right to do as a 

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co-tenant. It further had the right to produce and to sell all of 

the production in the absence of a request of an interest owner to 

take in kind. In so doing TXO, of course, had the obligation to 

make a full accounting to all the interest owners including Elrod 

for the costs and for sales of gas. Dilworth v. Fortier, 405 P.2d 

38 (Okla.). Elrod had a duty to either pay his share of the 

development and production costs to the operator or have them 

deducted from his share of production. TXO did not make an 

accounting to its co-tenant Elrod as it should have. When the 

special master made this accounting he determined that unpaid well 

cost due from Elrod exceeded Elrod's share of the gas produced. 

There is no objection to the development/production costs. The 

accounting to Elrod as required by the special master was his 

share of gas sales along with the other interest owners. His 

position was the same as the others, and no reason has been 

advanced as to why his share should be computed differently. The 

jury's characterization of the deletion of Elrod's interest in the 

well does not affect the accounting for gas production nor the 

valuation of the gas. 

The record shows that there was no conversion of gas or the 

property by TXO as Elrod urges. TXO had the legal right to 

develop the property, to produce and sell the gas. ITT Industrial 

Credit Co. v. L-P Gas Equipment, Inc., 453 F. Supp. 671 (W.D. 

Okla.). The working interest owners were tenants in common. 

Britton v. Green, 325 F.2d 377 (10th Cir.); DeMik v. Cargill, 485 

P.2d 229 (Okla.). The trespasser cases cited by Elrod are not 

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persuasive and no discussion is warranted. The failure of duty by 

TXO as operator was in not making an accounting to Elrod as the 

~ell was produced. This was accomplished by the special master as 

described. As the record shows at the time of the accounting, the 

amount due from Elrod still exceeded the proceeds of his share of 

gas sold. 

The special master, as to the Mcclung well, determined that: 

"The future rights, duties and obligations of 

the plaintiffs and the defendant Elrod with 

regard to the Mcclung well are to be governed 

by operating agreements actually executed by 

the plaintiffs and other non-operator working 

interest owners in the respective wells." 

This was approved by the trial court. 

We conclude that the duty of TXO to Elrod as to this well was 

enforced by the trial court in accordance with the jury finding, 

and that this was the proper remedy under Oklahoma law in these 

circumstances. 

The KBS Leases - TXO Cross Appeal 

In Elrod's counterclaim he asserts that TXO failed to pay him 

for leases he bought from third parties for TXO at its specific 

request. These have been referred to by the parties as the KBS 

leases. The jury found that "plaintiffs wrongfully refused to pay 

Hubert Elrod for the following leases" (the KBS leases were each 

then listed separately). 

Elrod's only evidence that TXO requested him to buy the 

leases was his own testimony that Durrett had told him to buy the 

leases, and that TXO would buy them from Elrod. The theory of the 

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counterclaim was either that TXO had "fraudulently" induced Elrod 

to buy the leases or that there was an oral agreement that he 

would buy thE!m. 

There could have been no fraud because there was no evidence 

whatever that the company did not intend from the outset to buy 

the leases. There was no evidence from the company records that 

it was buying the leases or that Durrett was acting for the 

company as to the leases. This took place during the period of 

time that the Elrod-Durrett conspiracy against TXO was active. 

The record shows that in all sales of leases procured by Elrod for 

TXO and sold to TXO during Durrett's employment by TXO, Elrod had 

paid Durrett (or Durrett and Stevens) 50% of his profit on the 

sales an exception being when the split was with another TXO 

employee. 

The record shows that Elrod bought the KBS leases and 

prepared assignments to TXO. Drafts were prepared which were 

signed by Durrett. Elrod deposited the drafts for the lease 

assignments in his bank in Oklahoma on March 16 for collection. 

They were sent to the TXO bank for payment and were refused on 

March 19. TXO had discovered the conspiracy on March 16 through a 

memo of Mrs. Elrod and had fired Durrett on the 19th. There was 

some delay by TXO in the paperwork on other transactions in which 

the Durrett-Elrod participation was not evident but this is not 

significant. There was no correspondence, memos or written 

directions or instructions to Elrod (or to Durrett) as to the 

purchase of the KBS leases. There is no evidence that there was 

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written authorization as to any of the other purchases made by 

Elrod. The company records are silent as to the KBS leases. The 

drafts sent for collection were typical in that they provided 

expressly that they were subject to acceptance by TXO. 

As to the KBS leases, the jury found that TXO had "requested" 

Elrod to make the purchase. The jury also found that the 

"plaintiffs wrongfully refused to pay Hubert Elrod for the 

leases." The special master determined (and the district court 

agreed) that Elrod was entitled to be paid for the KBS leases on 

the basis of the jury findings. 

There is no issue of fraud in the inducement by TXO in its 

refusal to accept the drafts. There was no contention at trial 

and no evidence that TXO had from the outset decided not to accept 

the drafts if the leases were bought by Elrod. The records of TXO 

contained nothing to show that it had authorized the leases to be 

bought. 

The trial court instructed on "fraud" and under this the jury 

could not have found fraud in this connection. It did describe 

TXO's refusal to accept the drafts as "wrongful," thus not 

warranted, or mistaken, or without reason. 

The plaintiffs moved for a directed verdict at the close of 

the evidence. This was denied. Thereafter plaintiffs, in 

response to the jury's affirmative answer to the interrogatory 

describing the refusal of TXO as "wrongful," moved for a judgment 

n.o.v. and for a new trial. This was denied. The special 

master's report determined the dollar amount of the KBS drafts and 

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charged these against TXO in the accounting. This was approved by 

the trial court. 

The plaintiffs have appealed the refusal by the trial court 

at trial to enter judgment n.o.v. or grant a new trial as to the 

KBS lease issue. 

Judgment n.o.v. is determined on appeal in accordance with 

Anderson v. Phillips, 861 F.2d 631 (10th Cir.); Brown v. McGrawEdison Co., 736 F.2d 609 (10th Cir.). Thus, without an evaluation 

of the evidence there was but one reasonable conclusion as to what 

the judgment should have been. See SA Moore's Federal Practice 

1 50.07[2]. In McGraw-Edison we also held that a motion for a new 

trial based on the weight of the evidence is a matter of 

discretion of the trial court as a fact question placed under the 

manifest abuse of discretion standard. See Harris v. Quinones, 

507 F.2d 533 (10th Cir.). The burden is necessarily on the movant 

for the judgment n.o.v., the inferences are for the party with the 

verdict and the evidence viewed favorably to support the verdict. 

As mentioned, the jury found by its answer to an 

interrogatory that "the plaintiffs requested Hubert Elrod to 

purchase the ••• leases." To support this answer there was 

Elrod's testimony which the jury chose to accept as against the 

silence of the company records on the matter. The finding of the 

jury must be accepted, and it has several important consequences 

as does the finding by the jury that "plaintiffs wrongfully 

refused to pay Hubert Elrod for the ••• leases." The jury thus 

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separated this transaction from the prior ones upon which the 

fraud finding was based despite the timing of the event. 

Furthermore, the direct request to buy these certain leases did 

not permit TXO, according to the jury, to refuse the drafts 

despite such provisions therein. 

Thus in summary, despite the similarity of the KBS lease 

purchase with the prior fraudulent ones and the timing, the jury 

by its findings did not consider it to be within the fraud. It 

separated it from the others. So the jury found that TXO 

"wrongfully refused to pay Hubert Elrod" for the KBS leases. This 

constituted a finding that the transaction was not tainted with 

the fraud and also the draft could not be refused. The special 

master and the trial court carried out this finding. 

The plaintiffs urge that the lease purchase arrangement was 

entirely verbal, and the statute of frauds covers the purchase/ 

sale of oil and gas leases. AiJanan v. Evans, 72 P.2d 479 (Okla.); 

Okla. Stat. tit. 15, S 136(5) (1981). We agree with the trial 

court. Also, in our view the statute of frauds was complied with 

by the signature of the drafts in the stated amounts by Durrett, 

the employee of TXO who regularly purchased leases as part of his 

duties although often wrongfully. The assignments of the leases 

describing the property, the price, terms, and description of the 

leasehold was included in the attachments to the drafts. This 

memorandum was sufficient and was signed by the party to be 

charged. There could have been no mistake as to the details of 

the transaction with the drafts and the assignments. 

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Farmouts 

The record shows sales of farmouts of existing TXO leases by 

the conspiracy to third parties without the knowledge of TXO. The 

proceeds of these sales were kept by the conspiracy although 

Durrett and Elrod represented to the purchasers that the money 

would go to TXO. TXO did not as a regular practice sell farmouts 

for cash but would trade them for other benefits useful to TXO 

such as development in certain areas or on particular leases. 

This fact that TXO did not expect cash for farmouts under usual 

circumstances did not excuse the fraud by the conspiracy when it 

sold for cash and retained the money for itself. The special 

master and the trial court were correct in considering the 

proceeds of the farmout sales as recoverable by TXO from 

defendants. 

We have examined the reasons why the trial court denied the 

recovery of attorney fees by TXO from the defendants. We agree 

with the trial court's analysis and with its characterization of 

the action. 

The parties have raised other issues, including the filing of 

the form 1099, which we have considered but find to be without 

merit. 

AFFIRMED. 

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Entered for the Court 

Oliver Seth 

Circuit Judge 

Appellate Case: 87-1351 Document: 010110031213 Date Filed: 03/19/1991 Page: 14