When Money Grew on Trees: Lucy v. Zehmer and Contracting in a Boom Market

Barak Richman & Dennis Schmelzer

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As generations of law students have learned, Lucy v. Zehmer is a tale of two “doggoned drunks” drinking liquor and bantering over the sale of a farm the weekend before Christmas in 1952. Adrian Hardy Zehmer, allegedly drunk and joking, scribbled a contract for the sale of his farm on the back of a receipt. Welford Ordway Lucy accepted and left, insisting that Zehmer was bound to the sale of the farm. The Virginia Supreme Court ultimately agreed with Lucy, ruling that a signed contract, even one signed by two men drinking at a bar, is no laughing matter.

For the most part, Lucy is narrowly read to represent its final holding: a court will look only to the outwardly manifested conduct of the parties to determine contractual intent. This legal principle remains as solidly entrenched in 2012 as when the court’s opinion was issued more than five decades ago. Yet despite the attention this case receives in the first-year contracts curriculum, little more is known about the case than what is found in the Virginia Supreme Court’s opinion.

Delving into the story of Lucy yields surprises and lessons that both inform the contemporary understanding of the case and generate deeper insights into contract law. Much more than a dispute over a farm, Lucy was a reflection of an agrarian society struggling with changes in its economic landscape. Important features of the economic and legal environment that surrounded Lucy’s encounter with Zehmer include the significant growth in southern Virginia’s pulp-and-paper industry, the consequent sharp rise in timber prices, and the resulting landgrab by zealous timber brokers that generated spurious land sales and tedious work for southern Virginia’s courtrooms. None of these factors are mentioned in the Virginia Supreme Court’s narrative, but, if the court had considered them in its description of Lucy’s fateful conversation with Zehmer, a reasonable person may have been less likely to conclude that Zehmer intended to be contractually bound.

When John C. Lucy, the brother of Welford, began his career as a lumberman in the 1930s, economic trends that had begun in the 1920s and accelerated throughout the 1950s were rapidly changing the business of lumbermen across the American South. As industrial leaders became increasingly aware of the economic potential in manufacturing paper from the southern pine, they invested heavily in manufacturing plants to convert pine into wood pulp, a raw material used to produce paper. New capital investments caused pulp-and-paper operations to expand quickly across the South, which by the mid-1950s was home to three-fifths of the nation’s paper manufacturing capacity. The growth in industrial capacity quickly depleted timber inventories and compelled paper manufacturers to expand their woodland holdings quickly to meet growing manufacturing demands.

Faced with the need for new resources, paper and pulp mill owners confronted a serious logistical challenge that had plagued the lumber industry decades earlier. The local pattern of landownership was highly decentralized, with most timberlands belonging to small family landholders, and thus posed considerable obstacles to mill operators seeking access to the region’s vast timber reserves. To navigate these straits, pulp and paper manufacturers relied heavily on local family-owned lumber companies to supply their timber needs.

By the mid-1950s, pulp and paper manufacturers purchased 75 percent of their timber requirements from local landowners. Industrial leaders grew increasingly aggravated, however, by the low productivity of forests controlled by small landowners as compared to lands owned by industrial interests, leading companies across the South to pursue more direct control over timber and timberlands. But corporate leaders feared that sudden acquisitions of large tracts of land, in addition to driving up purchase prices, would anger the same local farmers whom they relied upon for a majority of their timber resources. These concerns were solved by entrusting middlemen to locate and secure more remote and dispersed sources of timber to supply the tremendous growth in industrial capacity. These middlemen helped mill operators acquire timber rights in peripheral regions without alarming local residents, keeping land acquisitions quiet and not alerting owners to how undervalued their holdings were. Additionally, when legal disputes arose, these local middlemen often presented the courts with more sympathetic parties.

This strategy unleashed a legion of individual lumbermen looking to make quick profits by buying timber and timberlands from local landowners who were less familiar with the region’s suddenly booming timber market. Not surprisingly, these transactions often wound up in court, as landowners realized the true value of the sold assets. As early as the late 1920s, and especially in the 1950s, the Virginia Supreme Court regularly heard cases between local landowners, individual lumbermen, and local lumber companies. These cases often pitted neighbors, families, and even former business partners against each other over the control of the region’s trees and timberlands.

These disputes often resulted in lively and colorful litigation. One classic example, Jackson v. Seymour, has appeared in textbooks for at least as long as Lucy v. Zehmer and has been cited to demonstrate principles related to unconscionability, fiduciary duties, and constructive fraud. Jackson involved a widow who, after selling her family land to her brother, discovered that her brother had profited handsomely from harvesting timber on the land. After the brother refused to share the profits with his sister—or even to disclose to her what those profits had been, though it was later revealed that they approached ten times the land’s sale price—the widow, Lucy S. Jackson, took her brother to court for fraud. Albertis S. Harrison, the lead plaintiffs’ attorney in Lucy v. Zehmer, represented the buyer—and managed to persuade the trial court that Jackson’s brother did not know the timber on the property was valuable and, therefore, was not liable for fraud. Just the same, the Virginia Supreme Court took pity on the widow and ordered the contract rescinded and damages paid to the plaintiff under a new cause of action known as constructive fraud.

Harrison appeared again before the Virginia Supreme Court to represent landowners whose trees were taken by two lumbermen—one reportedly a “man of honesty and integrity”—who had been trolling rural Virginia.  Upon finding an elderly drunk near his home, the lumbermen had “obtained a bottle of whiskey [and] began negotiations” for standing timber. After inducing a sale, the lumbermen later learned—when caught harvesting the timber—that the elderly drunk who sold them timber rights did not own the land upon which the timber stood.  The lumbermen had been so eager to harvest the timber that they had not checked the deed books in advance. Under these circumstances, the Virginia Supreme Court found that the lumbermen had been grossly negligent and had committed a willful trespass.  To sanction their conduct, the court ordered the lumberman to pay the landowners a much higher price in damages than they would have otherwise paid the landowners for the same timber on the stump.

Against this background of a high stakes timber market and a series of shady transactions, Welford Lucy arrived in Dinwiddie County as a lumberman and a broker for local mills.  Like many of the county’s lumbermen at the time, he was eager to make quick profits off of the underutilized forests of local landowners, and he aggressively engineered a number of lucrative transactions during the timber boom. Property records reveal that Lucy, along with his brother John C. Lucy, signed dozens of land and timber deeds between the 1930s and the 1960s. Though generally involving properties smaller than the 471.6-acre Ferguson farm purchased from Zehmer, these deeds reflect a common pattern of business activity: the Lucy brothers would purchase farmland and then harvest the timber for sale to the Camp Manufacturing Company or other large paper mills. Sometimes the Lucys would resell the land after removing the timber, but often the immediate returns from harvesting enabled the Lucys to keep much of the land they bought.

In part, Lucy is a tale of two brothers in southern Virginia who made a fortune buying undervalued forested properties in remote areas and selling the timber from those properties for more money than they had paid for the land as a whole. Family legend describes Welford as a particularly skilled timber broker. He had a keen eye for “cruising,” which is the process of strolling through a property to determine the value of its timber. Although cruising usually involved taking careful measurements of a land’s timber and making calculations based on market prices, Welford could reportedly stroll around a property and intuitively make an accurate assessment of its value. In fact, Welford admitted in a deposition that he had driven around Zehmer’s property several times in the years prior to making his offer of $50,000 in December 1952, including one trip three weeks before the disputed sale. Those trips suggest that Welford’s eventual offer was based on a reasoned analysis of the value of the property’s timber rather than on an impulsive wager. Welford’s less-than-orthodox approach to negotiations—including slipping a bottle of liquor into his pocket prior to starting a discussion with the admitted intent to purchase a known drinker’s farmlands—may have also made him a good timber broker. As residents of Dinwiddie County recall, however, Welford’s approach to business did not make him many friends—or leave him with much of a reputation worth defending.

This was the context in which Lucy met Zehmer for a drink before Christmas in 1952, and understanding this context changes the interpretation of the case. Justice Buchanan, looking at the outward manifestations of Zehmer’s reported conduct and believing that $50,000 was more than a fair price, concluded that Lucy had been reasonable in thinking that Zehmer had intended to become contractually bound and thus enforced the written instrument. Our research suggests that Dinwiddie County was swarming with aggressive timber brokers like the Lucy brothers, many of whom employed unseemly tactics, many of whom had their eyes on the Ferguson farm, and many of whom—the record indicates as many as twenty-five—had been previously rebuffed by Zehmer. In light of this context of rapidly rising land values and hastily created contracts, one can understand the trial court’s refusal to order specific performance of the contract.

Our research also suggests that $50,000 was a relative bargain. The value of the farm’s timber alone far exceeded $50,000, and based on available documentary evidence, we estimate that by 1962 the Lucy brothers had earned at least $142,000 from their $50,000 investment less than a decade earlier. Contrary to the Virginia Supreme Court’s cursory analysis, we conclude that Lucy, and not Zehmer, reaped windfall profits from the sale.

Our findings therefore reveal more than a long misunderstanding of Lucy v. Zehmer. They also expose deficiencies in the objective theory of contracts, the very doctrine that Lucy has come to represent. The Virginia Supreme Court ruled on Lucy’s behalf because it concluded that the events of that December evening would have led a reasonable person to believe that Zehmer intended to enter into a contract. The outward manifestations observed by Justice Buchanan and the Virginia Supreme Court, however, reflect only part of what was well known to the parties—and likely well known to the trial judge as well. Although “objective” connotes a scientific approach, relying on different outward manifestations often leads to different conclusions. Unlike the caricature portrayed in the contracts classroom, the case involved sophisticated businessmen, a tumultuous economic climate, and the persistent lesson that appellate courts—and generations of contracts scholars—should be hesitant before stridently claiming to understand the facts of the case before them.

Acknowledgments:

Copyright © 2012 Duke Law Journal

Barak Richman is a Professor of Law and Business Administration at Duke University School of Law.

Dennis Schmelzer is an Associate at White & Case LLP.

This Legal Workshop Editorial is based on the following article: Barak Richman & Dennis Schmelzer, When Money Grew on Trees: Lucy v. Zehmer and Contracting in a Boom Market, 61 Duke L.J. (forthcoming 2012).


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