Cross v. Pasley

• Decision Date: 22 September 1959
• Docket Number: No. 16092.,16092.
• Citation: 270 F.2d 88
• Parties: William B. CROSS, Appellant, v. M. R. PASLEY, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

270 F.2d 88 (1959)

William B. CROSS, Appellant, v. M. R. PASLEY, Appellee.

No. 16092.

United States Court of Appeals Eighth Circuit.

September 2, 1959.

Rehearing Denied September 22, 1959.

Solbert M. Wasserstrom, Kansas City, Mo. (Bellemere & Bellemere, Kansas City, Mo., on the brief), for appellant.

Albert Thomson, Kansas City, Mo. (Davis, Thomson, Vandyke & Fairchild, Kansas City, Mo., on the brief), for appellee.

Before GARDNER, VOGEL and MATTHES, Circuit Judges.

MATTHES, Circuit Judge.

In this action appellee, M. R. Pasley, plaintiff below, seeks to recover the amount paid by him for certain securities alleged to have been sold in violation of the Missouri Securities Law (commonly referred to as "Blue Sky Law"), Chapter 409, R.S.Mo., 1949, particularly § 409.240 unless otherwise indicated, Missouri citations are to Vernon's Annotated Missouri Statutes, and the Federal Securities Act of 1933 (Title 15 U.S.C.A. §§ 77e, 77l). Trial of the case was commenced before a jury, but upon determination by the parties that the evidence presented no substantial dispute as to any material issue, the jury was discharged, and the cause submitted to the court. From the judgment in favor of plaintiff for $14,771.32, the amount allegedly paid by him for the securities, together with $1,477.13, as attorney fees,¹ the defendant has prosecuted an appeal to this court.

Jurisdiction to determine whether the transactions were in violation of the Missouri Blue Sky Law is present because of diversity of citizenship and amount involved. As to the alleged federal violation, jurisdiction is reposed by Title 15 U.S.C.A. § 77v.

The basis for the judgment was a specific finding by the trial court that the sales and offerings were in violation of both the Missouri and Federal Acts, supra.² The defendant challenges the judgment, asserting in effect that the findings of the court are clearly erroneous. We first direct our attention to the Missouri statute. The defendant contends that the parties were engaged in a joint adventure, and that therefore their transactions were not within the contemplation of the Missouri statute.

The defendant's position makes necessary a summary of the pertinent facts giving rise to the litigation.

Defendant and one Keith Chasteen formed a partnership known as C & C Petroleum Company. Letterheads of this firm were styled:

"C and C Petroleum Company Leases — Royalties — Production Fairfax Building W. B. Cross Kansas City 5, Missouri Keith Chasteen Baltimore 1-8447"

The partnership was formed for the purpose of discovering and producing oil. Defendant, or he and Chasteen, owned oil leases in Oklahoma and Kansas. In order to obtain funds to finance the drilling of wells the partnership entered upon the venture of selling interests in the oil leases. To accomplish and facilitate that objective the partnership made arrangements with one Frank E. Otey, a salesman, under which Otey was "to raise or help them raise money among various individuals to explore for oil and drill wells in connection therewith." Otey was not paid a salary, but worked on a commission of ten per cent (10%) of the total amount brought in from the sale of the interest, including drilling costs. Otey testified that he operated under no limitations with respect to prospective purchasers. In his words, "the man didn't have to be tall or short, or anything, in order to get in on these leases. Anybody who wanted to and whom I thought I could sell some of this drilling operation to, I would be interested in having them come in, because I would get my commission on that." It appears that Otey contacted 35 or 40 individuals and was successful in obtaining 30 or 35 as investors in the various leases. Apparently, defendant and Chasteen retained a full 1/8 interest each in the leases and sales were made of 1/32 interests in the remaining ¾ interest. In each case, a separate charge was made for the actual leasehold interest, but as an integral part of the deal, each purchaser was required to put up a substantial sum at the same time for the cost of drilling test wells. Thereafter, each buyer agreed to pay his proportionate share of completion costs. The record also indicates that defendant and his partner did not put up any money toward the cost of drilling the test wells. This "free ride" was deemed compensation for their services as "operators." They did, however, share their proportionate cost of completing wells. So much for the generalities.

Plaintiff is one of the numerous individuals contacted by defendant or his representatives, who invested in the oil leases. Over a period of approximately 8 months, beginning in December, 1955, plaintiff invested a total of $15,141.79 in leases which yielded him a total return of $370.47. The last wells were drilled in August, 1956, and this suit was filed October 4, 1956. The amounts invested, and the interests acquired in different wells, are revealed by the following exhibit:

                                  "Plaintiff's Exhibit 1
                                         Summary
                  Name of Well               Int.    Payments    Receipts
                  Thrasher No. 1 .........  1/32 |
                  Meek No. 1 .............  1/32  >  $ 4,016.79   $370.47
                  Parker No. 1 ...........  1/32 |
                  Thrasher No. 2 .........  1/32         150.00
                  Meek No. 2 .............  1/32         475.00
                  Padgett ................  1/16       1,850.00
                  Jones No. 2 ............  1/16       3,300.00
                  Jones No. 1 ............  1/16       1,850.00
                  Estate No. 1 ...........  1/16       3,500.00
                                                     __________
                      Total ....................     $15,141.79
                                                         370.47
                                                     __________
                                                     $14,771.32"
                

The sale of the interest to plaintiff in each lease was confirmed by a letter from the partnership, and ultimately consummated by written assignment of the interest purchased. The confirmation letter in regard to the first three leases is typical of the others, which differed only in land descriptions and sums of money to be paid. It contained this language in part:

"This letter confirms our recent verbal agreement under which you have agreed to acquire and purchase, and we have agreed to assign or cause to be assigned to you, an undivided 1/32nd of the 7/8th working interest subject to its proportionate share of None of 7/8th overriding oil and gas royalty interests in the oil and gas mining lease on and covering all of the land described as legal description follows.

"We agree to drill, or cause to be drilled, a test well for oil and gas at the drill site location described as Prescribed by geologist on each of three leases and agree that such wells shall be drilled to a depth sufficient to test the Mississippi Chat formation expected to be encountered to a depth of approximately 2000 feet, unless oil or gas in paying quantities, or granite, or other impenetrable substance is encountered at a lesser depth. For the drilling of this test well we agree to dig the pits and celler and to furnish all of the labor, water, materials, machinery, and supplies necessary or convenient for the drilling of the well to the above depth.

"Yourself and your representatives shall be entitled to free access to the derrick floor at all times, at your risk, and you shall be given all available information with reference to the depth and condition of the well and the formations encountered during the drilling of the same.

"As full compensation to us for your interest in said lease you agree to make payment to us of the sum of $225.00, and as compensation for your share of the cost in connection with drilling the three test wells hereinbefore mentioned you agree to make payment to us of the sum of $2,025.00 for your proportionate part of contract as above mentioned.

* * * * * *

"It is agreed that our respective rights and obligations hereunder are those of independent contractors, and nothing herein contained shall be deemed to create any relation of mining or other partnership as between us, * * *."

Also material to one of the issues are the following portions of the more formal operating agreement entered into between the partnership as "Operator," and a number of the investors, designated in the agreement as "Non-Operator":

It Is Further Agreed by the parties hereto that C & C Petroleum Company, shall be the `Operator\' of the above described lease and shall have the active supervision thereof to the extent and for the purpose set out in Exhibit `A\'."

* * * * * *

"Operator shall have full and complete control and, subject to the terms hereof, shall conduct and manage the operation and development of said leases for the production of oil and gas, or either of them for the joint account of Operator and Non-Operator."

* * * * * *

"It is not the purpose or intention of this instrument to create, and this agreement shall never be construed as creating, a joint venture, mining partnership or other relationship whereby any party shall be held liable for the acts, either or omission or commission, of any other party or parties hereto."

Concededly the interests in the leases were not registered as required by the Missouri Act. Neither does defendant question that such interests constituted securities as defined by § 409.020(3). Thus the basic issue is delineated to the rather narrow question of whether the transactions are exempted from operation of the law.

While § 409.040 exempts certain securities, and § 409.050 exempts certain transactions, it is clear that transactions between joint adventurers do not fall within the categories or classifications enumerated therein. Defendant does not premise his contention on the statute, but rather argues that from the teachings of the courts and other recognized authorities, the question has been put to rest, and that transactions between joint adventurers are not proscribed by Blue Sky Laws. He cites, among others, such ...