Opinion ID: 2456652
Heading Depth: 1
Heading Rank: 4

Heading: The Contention of Equitable Estoppel

Text: Petitioners contend that respondents are estopped from questioning the allocation of plant products which were measured by and delivered to them under the plant formula. In making this contention, Champlin relies primarily upon the jury's answers to special issues Nos. 2, 3, 4 and 5. The trial court submitted numerous special issues, many of which were evidentiary rather than ultimate in nature. [1] For discussion purposes here, we set out Special Issues Nos. 1 to 5, inclusive. 1. Do you find from a preponderance of the evidence that the plaintiffs knew prior to the time when Chastain met John McNamara, that the allocation method used by the defendants was different from the allocation formula described in the Natural Gas Processing Agreement? Answer: No. 2. Do you find from a preponderance of the evidence that the plaintiffs, prior to the time when Chastain met John McNamara, could have discovered by the use of ordinary care that the allocation method used by defendant was different from the allocation formula described in the Natural Gas Producing Agreement? Answer: Yes. 3. Do you find from a preponderance of the evidence that the plaintiffs, by acts, conducts, or silence, if any, led Champlin reasonably to believe that the plaintiffs approved of the continuation of the allocation method being used by the Champlin plant? Answer: Yes. 4. Do you find from a preponderance of the evidence that Champlin relied upon such acts, conduct, or silence of the plaintiffs, if any you have found in answer to the foregoing special issue? Answer: Yes. 5. Do you find from a preponderance of the evidence that but for such acts, conduct or silence of the plaintiffs, if any you have so found, Champlin would have taken voluntary action or legal proceedings to protect itself against loss if any resulting from the use of more than one allocation method? Answer: Yes. Champlin's argument is that although from and after the letter of September 12, 1958, Chastain may not have had conscious knowledge that there was difference between the contract formula and the plant formula, nevertheless, Chastain by virtue of the information contained in such letter and the statements subsequently rendered to him, must be charged with notice of the divergence between the formulae in view of the holdings of the jury. Chastain answers this argument by asserting primarily that the jury's answers to Special Issues Nos. 2, 3, 4 and 5 are not controlling of the case. It is urged that Champlin's letter of September 12, 1958, did not clearly disclose the situation to Chastain even when taken in connection with the statements subsequently delivered to him. It is also urged that there was no evidence to support the jury's answers to said Issues Nos. 2, 3, 4 and 5, and that such answers were contrary to the overwhelming preponderance of the evidence. The Court of Civil Appeals agreed with Chastain's primary position and held as a matter of law that Champlin's letter of September 12, 1958, which was delivered to Chastain as well as to all of the other producers furnishing gas to Champlin's processing plant was calculated to deceive and mislead Chastain. Much emphasis is placed upon the statement in the letter that Humble agrees with Champlin that this procedure (the plant formula) which has been in actual use since 1948 and adjusted slightly in 1952 is most equitable and after reviewing the entire matter Pan American expresses no disagreement with the procedure. It is pointed out that Humble and Pan American would receive more credits for plant products under the plant formula than they would under the contract formula. The basis of the decision of the Court of Civil Appeals is the broad maxim of equity, that he who seeks equity must come into court with clean hands; that [t]he doctrine of estoppel is for the protection of innocent persons, and only the innocent may invoke it. 31 C.J.S. Estoppel § 75, p. 453. Some reliance is also placed upon the jury's finding that Champlin failed to use ordinary care in failing to advise plaintiffs (Chastain) that the method of plant allocation that defendants (Champlin) were using resulted in plaintiffs being allocated less plant products than was provided for in the natural gas processing agreement. We do not follow this negligence argument. There was nothing careless about the notification Chastain received, even if such notice be deemed insufficient. The letter of September 12, 1958 was deliberately written. Chastain contends that it was artfully composed, designed to conceal rather than disclose. And this is essentially the basic premise of his argument. Equitable maxims suggest avenues of investigation, but decrees are usually based upon definite and specific guide lines. This lawsuit belongs to a specific category. It is essentially an accounting suit in that it involves an account running between the processor of gas on one hand and a producer of gas on the other. Millions of dollars have been paid out to numerous producers from month to month extending over a period of years. Many of the principles of an account stated have application here in view of the monthly statements rendered by Champlin to Chastain. Had Chastain actually and consciously realized that Champlin was operating upon an allocation basis different from that prescribed in the contract, an estoppel would have undoubtedly arisen against him, particularly after he had been requested in 1958 to make known any objections he might have to Champlin's continuing to operate the plant upon the allocation basis which had been in force since 1948. In re Shoemaker, 277 Pa. 424, 121 A. 510 (1923) by the Supreme Court of Pennsylvania, is closely in point here. It there appeared that the owners of adjoining lands underlaid with coal decided to conduct mining operations for their pecuniary advantage and agreed that the various tracts should be operated as a unit. The mining lease covering the tracts set forth a method of fixing the respective portions of the rents due each owner. This method was based upon an estimate of the coal underlying each of the tracts involved. However, in 1901 after receiving a report from a mining engineer that the coal in one of the veins was practically exhausted, the trustee in charge of disbursements from the proceeds of the mining operation notified all interested parties that the method of allocating royalties upon the basis of the estimated coal reserves would be discontinued and payment would thereafter be made upon the actual amount of coal produced from each tract. The trustee stated: I deem it advisable and really imperative to discontinue the payment of royalty on this vein on percentages as formerly, and in lieu thereof, make payments on a basis of actual mining or yield from each respective holding. As a consequence, some will receive for a time no royalty, some less, while others will receive an increase. The scheme of division set forth in the 1901 letter was followed for some eighteen years, yet, nevertheless, the Court of Common Pleas held that the plan of allocating royalties set forth in the lease (based upon estimated reserves) was controlling. The Supreme Court reversed, holding that notwithstanding the circumstance that the royalty allocation provisions contained in the lease were unambiguous, the eighteen years acquiescence in the division formula set forth in the 1901 letter raised an estoppel against the royalty claimants which precluded them from questioning the trustee's royalty allocations. The Court said: [T]he trustee advised all parties of the intended change (in the royalty allocation method), and that all would be paid thereafter as coal was mined under their several lots, and this was done, at the market price, without any objection for a long period of time. Some owners received prompt return for all they owned, while others were denied any. The lessors, with knowledge of the facts, permitted the substituted plan to be carried out, though it increased the present benefit to some at the expense of others, and ended in payment to a few for all the remaining coal owned, at the current rates, thus effecting, as far as they were concerned, the apparent purpose sought to be realized when the trust agreement was made. It would be inequitable to now permit a collection of a larger amount, based on the value of the unmined coal of others. If the price had fallen, instead of increasing, no recovery, in relief of those still owning, could have been had, the plan of payment having been in force with the consent of all, and those satisfied in full, or in part, should not be permitted now to repudiate the understanding. `Where a person, with actual or constructive knowledge of the facts, induces another by his words or conduct to believe that he acquiesces in or ratifies a transaction, or that he will offer no opposition thereto, and that other, in reliance on such belief, alters his position, such person is estopped from repudiating the transaction to the other's prejudice. And this is so regardless of the particular intent of the party whose acquiescence induces action.' 21 C.J. 1216. `But it seems that the acquiescence need not involve anything in the nature of a positive affirmation, as the rule is well recognized that when a party with full knowledge, or with sufficient notice or means of knowledge, of his rights and all the material facts, remain inactive for a considerable time or abstains from impeaching the transaction, so that the other party is induced to suppose that it is recognized, this is acquiescence, and the transaction, although originally impeachable, becomes unimpeachable.' 10 R.C.L. 694. If one, knowing his rights, sees the other acting on a mistaken notion as to his, an estoppel may arise. P. & R. C. & I. Co. v. Schmidt, 254 Pa. 351, 98 Atl. 964; Lancaster v. Flowers, 208 Pa. 199, 57 Atl. 526, and authorities there cited. The quotations from Corpus Juris and Ruling Case Law suggest the vital issue contained in the equitable estoppel contention. The phrases, [w]here a person, with actual or constructive knowledge of the facts and when a party with full knowledge, or with sufficient notice or means of knowledge are used. See, 31 C.J.S. 589, Estoppel § 114, 19 Am.Jur. 676, Estoppel, § 62. In the present case the jury has found that Chastain long prior to the time he instituted this suit could have discovered by the use of ordinary care that the allocation method used by Champlin was different from that contained in the Natural Gas Processing Agreement which he had signed. Is this finding taken in connection with the undisputed evidencethe knowledge imparted by the letter of October, 1958sufficient in law to impute to Chastain, notice of a difference between the plant formula and the contract formula, or stated another way, can it be said in the light of the jury's finding that Chastain had sufficient means of knowledge to charge him with notice of the fact that the plant formula and the contract formula were not identical? If so, then this case would come within the rule of the Pennsylvania case which is regarded as a sound decision relating to the problem before us. Whatever may be said as to the artfulness of Champlin's letter to those producing to its processing plant, such letter stated in words that no one could misunderstand that (1) a question had been raised as to the language in the processing agreements (the contract formula) as compared to the actual procedure (the plant formula) used by Champlin for the allocation of plant liquids (plant products); that (2) it was desirable that the same allocation formula be applied to all producers in the area, and that (3) unless objection was made, Champlin would continue to use the plant formula. The letter further referred Chastain to the monthly reports designated as Gas and Liquid Production Reports which Chastain had in his office. These reports not only showed what and how the plant liquids were allocated to Chastain, but contained the same information for the 164 other producers, including Champlin. These reports if carefully examined would disclose the difference in the two formulae simply by comparing the reports with the contract allocation. The letter to Chastain reported to him that the procedure used in allocating plant liquids was fully reflected in the Gas and Liquid Production and Disposition Reports, complete copies of which he received monthly. The truth of this representation is borne out by the testimony of Mr. Berry Holmes, an independent public accountant of Dallas, Mr. William E. Rembert, Jr., the man in charge of Chastain's accounting and who really acted as Chastain's righthand man, and Mr. Hillier, an independent public accountant with Price Waterhouse & Company, which concern was employed by Chastain to make an analysis of the same accounting statements to which the letter referred. All three testified in effect that the monthly reports made a full disclosure of the method of allocation used in the plant operation. Mr. Rembert further testified that the difference in the allocation method used at the plant and that described in the processing agreement was apparent on the face of the production and disposition reports. However, Chastain, and his office, made no check or review of the monthly reports sent to them, although their attention was specifically directed to the reports by the September, 1958, letter. Had a check been made, many details which Chastain now says were concealed would have been disclosed. This is demonstrated by the fact that William E. Rembert, Chastain's accountant, for the purposes of this suit, actually calculated the additional barrels of liquid which would have been allocated to Chastain by application of the allocation method set forth in the contract. In making this calculation, Rembert used the monthly reports which Chastain had in his office and demonstrated that he thoroughly understood the details of the reports and the operation of the plant allocation method. It therefore appears that within a short time after operations commenced under the gas processing contract, Chastain had reports in his office from which he could have ascertained that the accounting rendered by Champlin was not in accordance with the terms of the contract. The letter of September 12, 1958, rather pointedly called his attention to the fact that a question had been raised as to whether or not the accounting basis in use was the one which was prescribed in the contract and he was advised that unless objection was made within a thirty day period, Champlin would continue accounting to its gas producers on the same basis that had been used in the past. Then, in March of 1961, Chastain had his conversation with Castleberry and Castleberry informed him that if the contract formula were followed, he would receive an additional amount of money. Surely, had Chastain taken no action after the Castleberry interviews, he would not be in a position some years later to question the liquid hydrocarbon accounts. However, Castleberry gave Chastain no information he could not have obtained by examining the reports in his office. Conceding that Chastain might be excused for a failure to examine such reports prior to September 12, 1958, may it be said as a matter of law that he was also excused for a failure to examine such reports and compare the same with his contract from and after September 12, 1958, when he was told that a question as to the accounting basis had arisen and asked to make known any objection he might have to a continuation of the existing accounting method? We are of the opinion that it may not. We think there was some evidence from which a jury could conclude that the means of knowledge were available to a reasonably careful person and hence knowledge of Champlin's use of an allocation formula different from that set out in the contract should be imputed to Chastain. This case is one involving an account, and generally in the business world when an account is presented, the opposite party is under some duty to object thereto if the same be incorrect or inaccurate. Especially is this true when an explicit request for objection is made if the recipient be not satisfied with the accuracy of the account. The underlying principle is that of equitable estoppel or estoppel in pais. This doctrine was recognized by this Court in the case of Love v. Barber, 17 Tex. 312 (1856) in which it was said: The doctrine of an estoppel, not of record or under seal, called an estoppel in pais, was left for a considerable time in a state of perplexity and uncertainty. It is, however, believed that various adjudications have settled the doctrine on principles easy to be understood. Nowhere has it been more concisely and clearly laid down than by Lord Denman in the case of Pickard v. Sears, Eng. C. L. vol. 33, p. 117, [112 Eng.Rep. 179]. He says `that the rule of law is clear, that when one, by his words or conduct, wilfully causes another to believe the existence of a certain state of things, and induces him to act on that belief, so as to alter his own previous position, the former is concluded from averring, against the latter, a different state of things, as existing at the same time; and the plaintiff in this case might have parted with his interest in the property by a verbal gift or sale, without any of these formalities that throw technical obstacles in the way of legal evidence.' (See Walker's Adm'r v. Livingston et al., 3 Tex. 93.) This rule is much to be admired for its simplicity, its briefness, and it yet being expressive of the whole doctrine on the question. In the case of Gregg v. Wells, 10 Ad. & E. 97, 113 Eng.Rep. 35 (1839), Lord Denman referred to his former opinion and said: Pickard v. Sears (6 A. & E. 469), was in my mind at the time of the trial, and the principle in that case may be stated even more broadly than it is there laid down. A party, who negligently or culpably stands by and allows another to contract on the faith and understanding of a fact which he can contradict, cannot afterwards dispute that fact in an action against the person whom he has himself assisted in deceiving. It seems clear that under certain circumstances, one having the means of knowledge may be held to the same standard of responsibility as one possessing conscious knowledge. In Dimond v. Manheim, 61 Minn. 178, 63 N.W. 495 (1895), the Court after citing and quoting from Pomeroy, Equity Jurisprudence, set forth the following rules: The authorities are, however, substantially all agreed upon the following general propositions: First, to create an estoppel, the conduct of the party need not consist of affirmative acts or words. It may consist of silence or a negative omission to act when it was his duty to speak or act. Second, it is not necessary that the facts must be actually known to a party estopped. It is enough if the circumstances are such that a knowledge of the truth is necessarily imputed to him. Third, it is not necessary that the conduct be done with a fraudulent intention to deceive, or with an actual intention that such conduct will be acted upon by the other party. It is enough that the conduct was done under such circumstances that he should have known that it was both natural and probable that it would be so acted upon. It has been determined by Texas authority that imputed actual notice carries with it the same legal consequences as conscious knowledge. In Hexter v. Pratt, 10 S.W.2d 692, (Tex.Com.App.1928) it was said: Notice in law is of two kinds actual and constructive.    In common parlance `actual notice' generally consists in express information of a fact, but in law the term is more comprehensive. In law whatever fairly puts a person on inquiry is sufficient notice, where the means of knowledge are at hand, which if pursued by the proper inquiry the full truth might have been ascertained. Means of knowledge with the duty of using them are in equity equivalent to knowledge itself.    So that, in legal parlance, actual knowledge embraces those things of which the one sought to be charged has express information, and likewise those things which a reasonably diligent inquiry and exercise of the means of information at hand would have disclosed. The Hexter case was cited with approval by this Court in Woodward v. Ortiz, 150 Tex. 75, 237 S.W.2d 286 (1951), wherein it was said: It may well be, however, that the tax attorney and the County were charged with actual notice of the judgment even though they had no express knowledge thereof. Actual notice `embraces those things of which the one sought to be charged has express information, and likewise those things which a reasonably diligent inquiry and exercise of the means of information at hand would have disclosed.' The theory that Champlin relied on Chastain's silence after receiving the letter of September 12, 1958, has support in the fact that Champlin told Chastain that it would rely upon his silence and continue accounting for plant products in accordance with the plant formula then in use. Champlin thereafter distributed millions of dollars representing the proceeds from the liquids allocated to the various producing wells in accordance with the plant formula. By so doing, it continued to allocate less liquid products to some wells and more liquid products to other wells than it would have done under the contract formula. Since Champlin had contracts with all of the other 164 producers which contained the same allocation formula as that contained in Chastain's processing contract, it would follow that if Champlin were compelled to pay Chastain the difference between the plant products which would have been allocated to him under the contract formula and those actually delivered under the plant formula, then Champlin would have been able to recoup (in part, at least) by requiring a reallocation of products as to all other producers in conformity with the literal provisions of the formula set out in Section 8 of the gas processing agreement. If Champlin relied upon Chastain's silence in continuing to operate under the plant formula, then it lost its opportunity to reallocate the plant products under the contract formula and thus minimize the losses. There is some evidence supporting the jury's findings to Issues Nos. 2, 3, 4 and 5, and those findings are sufficient in law to support an estoppel precluding Chastain from now questioning his account with Champlin on the ground that the allocation of liquid hydrocarbons should have been made in accordance with the contract formula rather than the plant formula. This requires a reversal of the judgments of the Courts below.