Mason v. Marshall

Citation412 F. Supp. 294
Decision Date12 July 1974
Docket NumberCiv. A. No. CA-3-6517-D.
PartiesJoseph F. MASON et al., Plaintiffs, v. J. W. MARSHALL and Jack Houston Drilling Company, Defendants.
CourtU.S. District Court — Northern District of Texas

COPYRIGHT MATERIAL OMITTED

Joe E. Vaughan and John D. Gilliland, Dallas, Tex., for plaintiffs.

James S. Robertson, Jr., Dallas, Tex., for defendants.

MEMORANDUM OPINION

ROBERT M. HILL, District Judge.

The plaintiffs have brought this suit for recission of their purchases of fractional undivided interests in two oil and gas drilling ventures referred to as the "Seven Well" and "Mayes Re-entry" programs which were promoted and operated by the defendants. Plaintiffs have alleged that these interests were unregistered securities which were sold in violation of Sections 5 and 12 of the 1933 Securities Act, Section 10(b) of the 1934 Securities and Exchange Act and Rule 10b-5 promulgated thereunder, and the Blue Sky Laws of Texas and Tennessee. The defendants do not deny that the fractional undivided interests in their oil and gas ventures are "securities," but they urge that plaintiffs' causes of action are barred by limitations, that plaintiffs have waived their right to recission, and that these "securities" are exempt from registration under Section 4(2) of the Securities Act of 1933. Defendants also deny that they have committed any fraud.

I. The Facts
A. The Defendants

Defendant J. W. Marshall, through either the Marshall Pipe and Supply Company or the defendant Jack Houston Drilling Company, has been in the business of selling fractional undivided interests in oil and gas drilling ventures for nearly twenty years. Over the past ten years he admits to ten or fifteen separate ventures in which the primary investors were airline pilots, physicians or individuals who were knowledgeable of the oil business. None of these oil ventures, including those in dispute in the case at bar, was ever registered under the federal securities laws.

The defendant Jack Houston Drilling Company is a limited partnership formed under Texas law in 1970. The limited partners consist of investors who have participated in drilling ventures with Marshall and the general partners consist of Marshall and Jack Houston who is not a party to this suit. The Jack Houston Drilling Company was the issuer of the undivided drilling interests in the Seven Well and the Mayes Re-entry programs.

B. The Seven Well Program

In the summer of 1971 Marshall began to solicit investors for a drilling venture which he designated as the Seven Well program. At a meeting in his office Marshall told a group of potential investors that seven wells would be drilled on leases to be acquired from a geologist who had arranged for their acquisition. The potential investors were shown the general geographical area where the seven wells were to be drilled and were told that Jack Houston Drilling Company would designate the exact locations of the leases and that their drilling rigs would be used in the venture. Subsequently, 29 to 30 investors purchased an undivided fractional interest in the Seven Well program.

C. The Mayes Re-entry

On January 10, 1972, all of the working interests owners in the Seven Well program received a letter from Marshall explaining that a dry hole had been drilled on the first well of the Seven Well program and that a separate program called the Mayes Re-entry was being planned. This letter stated that this new drilling venture "has nothing to do with" the Seven Well program and that the remaining six wells in the Seven Well program would be drilled after the two wells in the Mayes Re-entry program were completed. At trial Marshall testified that he sent an invoice to all the plaintiffs for an interest in the Mayes Re-entry program proportional to their interest in the Seven Well program, after he had discussed the program with plaintiff Joseph Mason and had asked Mason to contact the other plaintiffs to determine if they would be interested in the Mayes Re-entry program. The letter of January 10, 1972, and the subsequent invoice was the only contact Marshall had regarding the Mayes Re-entry program with any of the plaintiffs except for Mason. All plaintiffs except Hardin and Houchin paid the full amount of the invoices for the Mayes Re-entry program. Hardin paid nothing and Houchin paid $398.86 of the $1,098.86 invoiced to him.

D. The Plaintiffs

The plaintiffs are R. D. Riley, Joseph H. Mason, R. W. Shirley, P. B. Hardin, Don Houchin, G. L. Mitchell, and K. P. Sisk. All plaintiffs are airline pilots who reside in Texas except for Sisk who is a retired airline pilot and resides in Tennessee. All plaintiffs are hereinafter referred to by their last names.

1. Riley

Prior to the Seven Well program, Riley had participated in several successful drilling ventures with Marshall. Marshall invited Riley to the Seven Well program meeting that was held in the summer of 1971. At that meeting Riley took notes concerning the program and examined the plats, geological maps and seismograph material that was related to the program. After that meeting he purchased a 1/64 interest in the program and later purchased an additional 1/64 interest after he had discussed the tax advantages of the deal with his accountant. Riley testified that his understanding of the tax consequences of the drilling venture was based on his prior dealings with Marshall and that he knew both Marshall and Jack Houston Drilling Company had retained some interest in the Seven Well program.

2. Mason

Mason also had participated in drilling ventures with Marshall prior to the Seven Well program. He first learned about the Seven Well program from Riley while playing golf together with Hardin and Shirley. After hearing some more favorable comments from other airline pilots about Marshall's drilling ventures, Mason contacted Marshall and purchased a 1/64 interest in the Seven Well program.

At trial Mason testified that he decided to invest in the Seven Well program as a result of the information relayed to him by Riley and other airline pilots who were at the summer of 1971 meeting. The only information that Mason received from Marshall about the Seven Wells program was that "it was a good drilling prospect"; however Mason testified that because of his experience in other oil ventures with Marshall, he understood that Jack Houston Drilling Company's drilling rigs would be used in the Seven Well program.

Mason also received and accepted a check denoted as payment for "commission" in the amount of $1,098.86 from Marshall, which amount was also the costs of Mason's interest in the Mayes Re-entry program. At trial Marshall testified that the check was a commission for Mason's efforts in soliciting the plaintiffs' investment in the Mayes Re-entry program.

3. Shirley

Shirley also learned of the Seven Well program from Riley while they played golf together with Mason and Hardin. Shirley testified that everything he had heard about the Seven Well program was from Riley, Mason, Hardin and other pilots and that he was encouraged to invest in the program when Riley had stated that "he had hit three out of four wells" in a previous drilling venture. At Shirley's request, Mason took him to Marshall's home where they talked briefly about the drilling venture and Shirley then purchased a 1/64 interest in the program. The only facts represented to Shirley by Marshall were that seven wells would be drilled on a 5,000 acre tract.

4. Hardin

Hardin learned of the Seven Well program while playing golf with Mason and Riley. Hardin testified that he was looking for a tax shelter and that he told Mason that he had some money to invest and that he wanted an interest in the Seven Well program. The only time Hardin talked to Marshall was when Mason took him to Marshall's house. After a brief conference, Hardin gave Marshall a check for $6,250 for a 1/64 interest in the Seven Well program. Later that same evening Hardin and Marshall got into an argument and Marshall destroyed Hardin's check and told him that he was out of the deal. The next morning, however, at the urging of another airline pilot who had invested in the Seven Well program but who is not a party to this suit, Hardin sent another check which was subsequently accepted by Marshall. Hardin testified that his decision to invest in the Seven Well program was based on what he had heard from other airline pilots who had invested with Marshall.

5. Houchin and Mitchell

Houchin and Mitchell learned of the Seven Well program from Mason, Riley and other airline pilots who had invested in oil ventures with Marshall. Both decided to invest in the program prior to meeting Marshall and both testified that all information they received about the Seven Well program was from Mason, Riley and other airline pilots.

6. Sisk

Sisk, like Mason and Riley, had also participated in drilling ventures with Marshall prior to the Seven Well program. Sisk resided in Tennessee and testified that he had repeatedly called Marshall each time he had flown to Dallas and inquired into possible oil ventures. On one occasion Marshall told Sisk about the Seven Well program and the costs of buying an interest in that program. This was all the information Sisk had when he invested in the Seven Well program and he testified that he had never talked to anyone else about the Seven Well program prior to his investment.

II. Section 12(1) Violation

Plaintiffs allege among other things that the defendants violated § 5 of the Securities Act of 1933, 15 U.S.C. § 77e, in that the defendants offered for sale and sold securities as to which a registration statement was not in effect. Plaintiffs urge that pursuant to § 12(1) of the Act 15 U.S.C. § 77l (1), they are entitled to rescind their purchase and recover the consideration paid.

A. Limitations

The defendants assert that plaintiffs' cause of action under § 12(1) of the Act is barred by limitations as provided...

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