Gilbert v. Nixon

• Citation: 429 F.2d 348
• Decision Date: 10 June 1970
• Docket Number: No. 68-68.,68-68.
• Parties: M. P. GILBERT, M. J. Lebsack, and A. R. Lebsack and M. J. Lebsack, a partnership d/b/a Lebsack Development Company, Appellants, v. Richard P. NIXON, a/k/a R. P. Nixon, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

429 F.2d 348 (1970)

M. P. GILBERT, M. J. Lebsack, and A. R. Lebsack and M. J. Lebsack, a partnership d/b/a Lebsack Development Company, Appellants, v. Richard P. NIXON, a/k/a R. P. Nixon, Appellee.

No. 68-68.

United States Court of Appeals, Tenth Circuit.

April 3, 1970.

As Amended on Denial of Rehearing June 10, 1970.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Gerald Sawatzky, Wichita, Kan., for appellants.

Marvin E. Thompson, Russell, Kan., for appellee.

Before HILL, Circuit Judge, FAHY,^* Senior Circuit Judge and HOLLOWAY, Circuit Judge.

FAHY, Senior Circuit Judge.

In a suit filed in the United States District Court for the District of Kansas, plaintiffs, now appellants, sought to recover from appellee, defendant in the District Court, damages including some $190,000.00, alleged to be amounts invested by them in the purchase from appellee of fractional interests in thirteen oil and gas leases. Appellants base their claim on alleged violations by appellee of the federal and Kansas securities statutes. After a lengthy trial without a jury the court entered Findings of Fact and Conclusions of Law upon the basis of which judgment was rendered for appellee in the main case. Appellants, however, received a judgment in the sum of $5,657.11, representing their share of certain discounts and oil payments for which appellee had not accounted. We affirm that judgment for appellants. As to the judgment for appellee we affirm in part, remand in part, and reverse in part, as to be explained.

Appellant M. J. Lebsack¹ is a graduate petroleum engineer with offices in Denver, Colorado, experienced in the purchase and sale of fractional working interests in oil and gas properties in the mid-continent fields. His principal activity since 1956 has been the supervision of the oil and gas investments of appellants M. P. Gilbert and her husband, B. D. Gilbert, the manager of her investments. Both Gilberts were residents of Connecticut. Appellee R. P. Nixon is a graduate petroleum geologist generally engaged as a consulting geologist and in drilling and operating wells on oil and gas leases in the mid-continent fields. The transactions from which this suit arose began in May, 1960, but the parties had been associated in similar ventures commencing in 1957. From May, 1960, through February, 1963, the Gilberts, acting for purposes of this decision through their agent Lebsack,² purchased from appellee Nixon fractional interests in sixteen oil and gas leases located in four Kansas Counties. Thirteen of these fractional interests are the subject of this suit.

Nixon would acquire an oil and gas lease from a landowner. He would then submit a proposal to Lebsack for the purchase by appellants of a fractional working interest in the lease. Accompanying the proposal would be a geological map derived from a base map of the area and upon prior drilling activity as evidenced by available well completion cards. The geological map represented Nixon's opinion of the sub-surface contours of the geological formations giving a significant indication of possible productivity at the proposed site. Nixon would also transmit to Lebsack production information on nearby wells, his drilling plans, and his geological opinion as to the likelihood of encountering oil. Lebsack would evaluate the proposal from the data submitted by Nixon and, at times, from other available information. He then sketched his own geological map and submitted this to the Gilberts along with his evaluation of the Nixon proposal. They then advised Lebsack of their desire to participate, and to what extent, and Lebsack would execute a letter agreement in a form furnished by Nixon.³

The drilling, equipping and operating of the leases were supervised by Nixon. Appellants were kept advised by Lebsack primarily on the basis of communications between Nixon and Lebsack. Nixon billed Lebsack for appellants' proportionate share of the drilling costs upon completion of the drilling. If Nixon determined from drilling tests to install production equipment the Gilberts were billed through Lebsack on a monthly basis for their fractional share of operating costs. Fractional payments for oil produced were received by appellants directly from the purchasing company.

Production casing was set and some production obtained or attempted from wells on leases known as Bowlby, Ewing "B", Ginther, Driscoll, Herber, and Pendergast, all of which fractional interests were purchased by the Gilberts under procedure conforming generally with that above outlined. The Driscoll, Herber and Pendergast interests were soon abandoned as non-commercial. The Bowlby, Ewing "B" and Ginther leases, marginal producers, were sold at appellants' loss. Purchases were also made by the Gilberts from appellee Nixon of fractional interests in leases known as Steinert, Ewing "A", Hlad, Brungardt "C", Teeters, Snapp and Vogel. Wells on all these last named leases were plugged and abandoned as dry holes.

Appellants' suit, filed in June, 1964, alleged violations of the Federal⁴ and State⁵ Securities Acts and common law fraud,⁶ with respect to the interest purchased by them in the thirteen oil and gas leases mentioned. The damages claimed are roughly the amounts invested by appellants with appellee in connection with the interests they purchased.⁷

The District Court held, in part, as follows: (1) the fractional interests were "securities" within the meaning of 15 U.S.C. § 77b(1);⁸ (2) offers or sales of fractional interests in oil and gas leases to persons such as appellants, knowledgeable and experienced in such transactions, with whom the offeror had a long standing association in other leases were "transactions by an issuer not involving any public offering," 15 U.S.C. § 77d(2), and thus were exempt from the civil liability provisions of 15 U.S.C. § 77l(1);⁹ (3) there is no need under 15 U.S.C. § 77l(2) or K.S.A. § 17-1268(a) for the seller of a fractional interest to state every fact which, if known to the prospective purchaser, might tend to influence his decision; (4) in cases where untrue statements were made or where there were omissions to state facts, the statements or omissions were "not material, and also * * * defendant has sustained his burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission." Defining materiality the court stated (5):

Whether representations or omissions of fact are material depends upon the subject matter of the transaction and the relationship and knowledge of the parties. Such representations or omissions are material when it relates to some matter which is so substantial and important as to influence the party to whom it is made and if the transaction would not have occurred in their absence; but conversely, the representation or omission is immaterial if the transaction would have occurred in the absence of such representations or omissions, or if the representations or omissions causes no injury, or if they were mere expressions of opinion.

The court also ruled that (6) any action plaintiffs may have remaining against defendant, or conversely, would be an action for accounting and/or breach of contract. Other findings and holdings of the court, to the extent deemed necessary, are considered in relation to the subject to which directed in the course of this opinion.

We agree with the District Court that the fractional interests in this suit were securities within the meaning of 15 U.S.C. § 77b(1) of the 1933 Act as well as 15 U.S.C. § 78c(10) of the 1934 Act and K.S.A. § 17-1252(j). Woodward v. Wright, 266 F.2d 108 (10th Cir. 1959). We also agree with the District Court that the fractional interests were "transactions by an issuer not involving any public offering," see, 15 U.S.C. § 77d(2), Woodward v. Wright, supra; Garfield v. Strain, 320 F.2d 116 (10th Cir. 1963), and SEC v. Ralston Purina Co., 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494 (1953), from which it follows that they were exempt from the registration requirements of 15 U.S.C. § 77e. Consequently, there is no liability under the provisions of 15 U.S.C. § 77l (1).

The statutory foundation upon which appellants rest their case is built primarily upon Section 10(b), 15 U.S.C. § 78j(b)¹⁰ of the Exchange Act of 1934 and Rule 10b-5, 17 C.F.R. § 240.10B-5, issued thereunder, which provides in clause (2) as follows:

It shall be unlawful for any person * * * (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading * * * in connection with the purchase or sale of any security.

While appellants in their brief on appeal consider liability under Rule 10b-5 to be "most appropriate" they also pursue remedies under, and the trial court appears to have based its decision upon, claimed violations of Section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2), which is comparable to Section 17-1268 of the Kansas Securities Act. Section 12(2) provides that a purchaser may recover the consideration paid for a security, less the amount of any income received therefrom, or damages if he no longer owns the security, if the seller offers a prospectus which includes:

an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission.

We now consider whether the trial court, in denying recovery by appellants, applied to the evidence the correct legal principles. We recognize that purchasers of securities have an implied private action for damages under Rule 10b-5¹¹ in addition...