NEET ET AL v. HOLMES ET AL (1943)

This is an appeal by plaintiffs from a judgment dismissing the action, after the trial court had sustained defendants' demurrers, without leave to amend, to the second and fifth causes of action set forth in the amended complaint then before the court, and after plaintiffs, upon said demurrers being sustained, had voluntarily dismissed the two remaining causes of action set forth in the complaint. The amended complaint in question was the fourth complaint filed in the action and was designated “Second Amended Complaint Redrawn in Conformity with Ruling on Motion to Strike.” It has been referred to herein as the fourth complaint, and for convenience will be designated merely as “the complaint”.

The case involves certain mining claims and mining patents located in Imperial County; and it should be stated at the outset that the allegations of the fourth complaint herein reveal what in general amounts to a usual plan of operations in the history of gold mining in the State of California. Plaintiffs, however, in their complaint charge certain of the defendants with a conspiracy to defraud plaintiffs; and the following facts are drawn from the allegations of the complaint:

In 1896 one Mary E. Greathouse was the owner of a 55/100ths interest in three patented mining claims located in what is now Imperial County, in the State of California, and one Kate S. Wright was the owner of the remaining 45/100ths interest therein. The plaintiffs are either heirs or successors in interest of Mary E. Greathouse. Defendants Sumner B. Wright and Nina B. Slatter are successors in interest to Kate S. Wright and were joined as party defendants because of a failure to comply with plaintiffs' demand to join in the action. It is alleged that defendants Kenneth A. Holmes and Edmund A. Nicholson were associated as partners in mining ventures and that in the latter part of the year 1934 or in the early part of 1935 the said defendants made an examination of the said patented claims and the tailings thereon, and, apparently on the basis of the information thus obtained, believed the claims were valuable. Thereafter defendants Holmes and Nicholson “ascertained the existence and identity” of defendant Fitzgerrell, conferred with him and informed him of their examination of the claims and their opinions thereon. It is charged that these three defendants then entered into “a conspiracy, scheme, plan and arrangement for the purpose of unlawfully and illegally, and by the practice of fraud as hereinafter alleged, obtaining for their own use and benefit the possession and control of the aforesaid patented claims and tailings thereon”. The overt acts in furtherance of the conspiracy involve the plan of defendants to consolidate the interests of plaintiffs, who lived out of the state, in order that the mining operations could be expedited. This plan embodied the formation of a corporation, viz: the Rayfitz Company, to which plaintiffs transferred their interests in exchange for shares of stock in the corporation. Plaintiff Neet was made a member of the board of directors of the corporation. The corporation then executed a lease of the patented claims to defendants Holmes and Nicholson for the purpose of carrying on the mining operations. The lease provided for the payment of royalties to the corporation, based upon a percentage of the recovery. This lease was entered into August 7, 1935, and was for a term of five years, expiring on August 7, 1940. After the execution of the lease Holmes and Nicholson went into possession of the claims, started mining operations and continued the same to the end of the term of said lease and paid to the corporation or a representative of plaintiffs royalties as provided in the lease.

It is alleged that the defendant conspirators failed to disclose to the stockholders the true terms and conditions of the lease and falsely and fraudulently represented that the said lease was fair in every respect so far as the corporation, the Rayfitz Company, and the stockholders were concerned. A copy of the lease is attached to the complaint as an exhibit but the complaint does not allege wherein or in what respect the terms of the lease were not fair or were not as represented.

During the term of said lease and about September, 1937, it was discovered by plaintiffs that defendants Holmes and Nicholson had financed the first trip defendant Fitzgerrell took to Kentucky in an effort to see the plaintiffs or some of them and induce them to enter into the plan; that adjoining lands to said claims had been located by others; that Fitzgerrell was being paid $200 per month by the Rayfitz Company and that extensive mining was being done under the lease. Plaintiffs therefore took over the control of the Rayfitz Company in February, 1938, elected a new board of directors; and in November, 1938, the said corporation and plaintiffs gave notice to defendants of the rescission of the lease, together with a demand for possession and an accounting. Defendants did not comply with said demands and thereafter the said defendant lessees paid all royalty checks to William Ellis Lady, attorney for plaintiffs, until the lease terminated. Lady acknowledged receipt of the royalties for and on behalf of said Rayfitz Company and plaintiffs, but in doing so, expressly stated that such moneys were being received without waiver of the notice of rescission. Thereafter plaintiffs gave Rayfitz Company notice of the rescission of the transaction pursuant to which they had conveyed their 55/100ths interest in the said three claims covered by the lease, the corporation consented thereto, and on July 5, 1939, conveyed said interest to Fred Glenn as trustee and shortly thereafter the said trustee transferred said interests to plaintiffs and the stock of said corporation was returned to the corporation. The same process was followed with regard to the interest of defendant Slatter and the interest held by defendant Fitzgerrell on behalf of defendant Wright; but it does not appear in this case that the stock certificates were surrendered for the said interests.

To better illustrate the nature of the overt acts alleged to have been committed in furtherance of the conspiracy the following is quoted from the complaint, being a portion of paragraph XIV of the second cause of action:

“(e) Defendant Ray H. Fitzgerrell, on or about February 27, 1935, proceeded to the City of Versailles, Kentucky, arriving at said place on or about March 1, 1935. On or about said date he contacted at said place plaintiff Thomas Porter Neet, and entered into negotiations with said Thomas Porter Neet, in the course of which he wilfully and carefully concealed from plaintiff Thomas Porter Neet, and from said Jessamine Porter Neet, said conspiracy with defendant Kenneth A. Holmes and said Edmund A. Nicholson, and that the expenses of his journey were being paid by the defendant Kenneth A. Holmes and said Edmund A. Nicholson, or that said conspirators had had any discussions, plans or negotiations whatever with respect to said three claims, or that the tailings and workings thereon were valuable; but on the contrary he represented to plaintiff Thomas Porter Neet that said properties were of little and problematical value, being an old worked out mine, and a mere gamble and had no real or substantial merit; that he had not in mind any prospective operators, nor did he know of anyone interested in said patented claims; and that he was making said trip at his own expense to investigate the possibility for future action on behalf of his relatives, defendant Sumner B. Wright and said Kate S. Wright; that if a way could be found to consolidate all interest in said patented claims, he would devote of his time solely in order to be helpful to said Sumner B. Wright and Kate S. Wright, and find out what could be done about said patented claims. Whereupon, said Ray H. Fitzgerrell suggested that the interest of the various owners of said patented claims be conveyed to a corporation, and, in order to further lull plaintiff Thomas Porter Neet into a sense of repose, also suggested that said Thomas Porter Neet should be a director thereof, but that he need not participate in the meetings, and management thereof in California, but that he could safely leave all those matters to the said Ray H. Fitzgerrell by signing all necessary consents in blank;

“(f) While at Versailles, Kentucky, on or about March 1, 1935, and in order to further induce plaintiff Thomas Porter Neet to place trust and confidence in him, said defendant Ray H. Fitzgerrell promised and agreed with plaintiff Thomas Porter Neet that he, said Ray H. Fitzgerrell, as soon as he returned to the State of California, would locate or cause to be located or otherwise acquire that portion of the public domain contiguous and adjacent to and surrounding said patented claims which might be open to location or acquisition for the benefit of the owners of said patented claims, so that the said potential claims could be worked advantageously; * * *”

It appears from the allegations of the complaint that defendants Holmes and Nicholson located claims on the contiguous territory. It also appears from the allegations of the third cause of action that for ores removed from plaintiffs' holdings, of a value which might be estimated in excess of $500,000, total royalties were paid of $32,017.27. The nature of the charges of fraudulent dealing is revealed by the foregoing quotation; and it may be said that the allegations of the second cause of action here considered do no more than describe the progress of an ordinary mining venture, or, for that matter, the progress of any ordinary business venture. It is as if the term conspiracy were applied to the organization of any corporation. If plaintiffs did not receive all the royalties to which they claim they are entitled, that is a matter for an accounting between the parties. A failure to render a proper accounting in itself does not vitiate the entire undertaking or warrant its being classified as a conspiracy to defraud. The representations and concealments attributed to Fitzgerrell, revealed by the above quotation, obviously are not of a character to constitute fraud under the circumstances presented. As to any representations as to the value or lack of value of the claims, it should be pointed out that the allegations reveal them to be old claims, that defendants Holmes and Nicholson only “believed” the claims had value. It therefore appears from the allegations made that at the time of the conference on the subject between Fitzgerrell and Neet it was true that the value of the claims was problematical and that the venture was a mere gamble. In any event, the circumstances then existing, as revealed in the allegations of the complaint, justified such an expression of opinion on the part of Fitzgerrell. It is sufficient to state here that the allegations of the second cause of action fail to reveal any fraud, actual or constructive upon the part of defendants.

The attempt upon appellants' part to class the parties as joint adventurers and to demonstrate the existence of a relation of trust and confidence between defendants and plaintiffs is of no more avail here than if such attempt were made in any such venture. The parties were no more engaged in a joint adventure here than would be any parties to an effort to organize a corporation for the purpose of consolidating holdings in order to lease mineral rights for mining operations; and the parties are in no greater relation of trust and confidence than are any parties to any ordinary business deal. If the transaction recounted by the complaint in this instance resulted in a trust relationship the same might be said of all business transactions. Manifestly, defendants Holmes and Nicholson, who operated the mine under lease from the corporation, were neither joint adventurers with, nor trustees for, plaintiffs; and plaintiffs have completely failed to implicate any of the defendants in a conspiracy. They have shown no fraud nor any damage as a result thereof. As already mentioned, if plaintiffs feel that they should have received a greater share of the profits from the venture, that is a matter for adjustment between the parties by an accounting or otherwise. Plaintiffs may not found an action for fraud upon the sole fact that they did not receive as much as they feel they should. It might be pointed out that this action was commenced after the term of the lease had expired, and the value of the holdings had been proven by the operations. It should also be pointed out that the facts as stated by the complaint furnished plaintiffs no basis for a rescission of either the lease or the transaction wherein the corporation was formed.

By the fifth cause of action it is sought to establish a constructive trust in the claims contiguous to the patented lands, for the benefit of plaintiffs, which claims, as above mentioned, were located by Holmes and Nicholson. The practice of locating such claims contiguous to the location of a proposed site of operations is a common one in mining for gold. Appellants in their argument reveal the theory of this cause of action as one founded upon the existence of a fiduciary relation between Fitzgerrell and plaintiffs, and also argue that such a relation also existed as between defendants Holmes and Nicholson and plaintiffs. The basis for such argument is that the parties were engaged in a joint venture. As already mentioned, the elements of a joint venture are lacking in the allegations made. The venture was one in which Holmes and Nicholson sought to set up mining operations upon the three old mining claims in question. In order so to do it was necessary to locate the owners of the interests in these claims and enter into some agreement with them whereby the claims might be worked. This was done, and to expedite proceedings the interests of the owners were consolidated through the organization of a corporation in which the owners of the interests became stockholders. The corporation then executed a lease to Holmes and Nicholson, who operated the mine and paid royalties under the lease. It is plain that the parties involved were in no sense engaged in a joint undertaking, and that the interests of plaintiffs, of Fitzgerrell, of Holmes and Nicholson, and of the other defendants were separate and distinct. There was certainly no joint venture by which the contiguous claims were established. This operation was one undertaken by Holmes and Nicholson to protect their interests as lessees. It of course follows that in thus protecting their interests defendants Holmes and Nicholson also protected the interests of plaintiffs, who of necessity stood to profit by efficient operation of the gold mine; but it must be emphasized that the interests of each of the parties in the operation was distinct. Plaintiffs incurred no expense and paid nothing for the location of the claims mentioned. In fact, the expense of the entire mining operation was borne by defendants Holmes and Nicholson, so far as appears from the complaint; and from all that appears, the risk of loss was likewise to be borne by them.

Appellants make the further contention that, apart from their theory of joint adventure, since defendant Holmes was appointed administrator with the will annexed of the estate of Mary Greathouse, as such a fiduciary he breached his trust to plaintiffs as devisees, or successors of devisees, by locating or acquiring an interest in the outlying claims. In support of this contention appellants argue that the location of such claims adversely affected the interest of plaintiffs because Fitzgerrell had promised plaintiffs that claims would be located on the surrounding territory for the benefit of the owners of the three patents, and that this promise was made for the purpose of dissuading and preventing and did dissuade and prevent plaintiffs from themselves making the locations. The facts of the complaint belie such argument. There is nothing to show that plaintiffs had any intention of locating claims on land adjoining their holdings. There is in fact no indication whatsoever that plaintiffs ever intended to work their holdings themselves; and from all that appears in the allegations of the complaint the holdings would probably never have been worked had it not been for the efforts of Holmes and Nicholson. It cannot be said, therefore, that upon the face of the complaint it appears that plaintiffs were in any way prevented or dissuaded from locating the contiguous claims. Moreover, from all that does appear, the promise of Fitzgerrell in this respect, as allegedly made to Neet, was fulfilled through the location of the claims by Holmes and Nicholson. But there is absolutely no basis upon which to hold that plaintiffs had any equitable claim to these locations; and Holmes' action as an individual in locating the claims was in no way detrimental to the interests of the devisees or successors of Mary Greathouse, and hence not inconsistent with his position as administrator with the will annexed of her estate. It must be plain from a reading of the facts as alleged that this action in locating such claims was, if anything, beneficial to the interests of plaintiffs. Plaintiffs could not well expect to obtain an equitable interest in such claims without having paid any consideration for the acquisition thereof; and it does not appear that Fitzgerrell, or any of the other defendants, obtained an unfair advantage of plaintiffs through the acquisition of such claims. No secret profits are shown to have been derived therefrom by Fitzgerrell; in fact, the complaint falls short of revealing any unfair advantage to have been taken of plaintiffs in any respect.

The ruling of the court upon the demurrers to the second and fifth causes of action of the complaint was obviously correct; and in view of the fact that plaintiffs have endeavored four times over the period of a year to state their causes of action, each time without success, it clearly lay within the discretion of the trial court to deny further leave to amend.

The judgment is affirmed.

DORAN, Justice.

YORK, P. J., and WHITE, J., concur.