Nolfi v. Ohio Kentucky Oil Corp.

• Decision Date: 04 April 2012
• Docket Number: Nos. 09–4315,09–4323.,09–4316,s. 09–4315
• Parties: Gregory M. NOLFI, as Successor Trustee under the Frederick E. Nonneman Declaration of Trust Dated August 19,1994, as Amended; Anita C. Nonneman, as Executrix of the Estate of Deceased Frederick E. Nonneman; Rena Nonneman, Plaintiffs–Appellees/Cross–Appellants, v. OHIO KENTUCKY OIL CORPORATION; Carol L. Campbell, individually and as Executrix of the Estate of Deceased William M. Griffith, Defendants–Appellants/Cross–Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

675 F.3d 538

Gregory M. NOLFI, as Successor Trustee under the Frederick E. Nonneman Declaration of Trust Dated August 19,1994, as Amended; Anita C. Nonneman, as Executrix of the Estate of Deceased Frederick E. Nonneman; Rena Nonneman, Plaintiffs–Appellees/Cross–Appellants,

v.OHIO KENTUCKY OIL CORPORATION; Carol L. Campbell, individually and as Executrix of the Estate of Deceased William M. Griffith, Defendants–Appellants/Cross–Appellees.

Nos. 09–4315

09–4316

09–4323.

United States Court of Appeals, Sixth Circuit.

Argued: March 4, 2011.Decided and Filed: April 4, 2012.

ARGUED: Thomas W. Connors, Black, McCuskey, Souers & Arbaugh, Canton, Ohio, for Appellants. Dennis R. Rose, Hahn, Loeser & Parks LLP, Cleveland, Ohio, for Appellees. ON BRIEF: Thomas W. Connors, Gordon D. Woolbert, II, Black, McCuskey, Souers & Arbaugh, Canton, Ohio, for Appellants. Dennis R. Rose, Eric B. Levasseur, Steven J. Mintz, Hahn, Loeser & Parks LLP, Cleveland, Ohio, for Appellees.Before: COLE, GIBBONS, and ROGERS, Circuit Judges.

OPINION

JULIA SMITH GIBBONS, Circuit Judge.

This case involves allegations of fraud and misrepresentation in the issuance of securities related to oil and gas interests. Following a jury verdict for plaintiffs, defendants-appellants/cross-appellees Ohio Kentucky Oil Corporation (“OKO”) and Carol L. Campbell, both individually and as executrix of the Estate of William M. Griffith, appeal numerous rulings of the district court. Plaintiffs-appellees/cross-appellants Gregory M. Nolfi, as successor trustee under the Frederick E. Nonneman declaration; Anita C. Nonneman, as executrix of the Estate of Frederick E. Nonneman; and Rena Nonneman ¹ (together the “Nonneman plaintiffs”) cross-appeal two additional issues. For the reasons that follow, we affirm in full the decisions of the district court.

I.

This case stems from a series of investments made by Frederick E. Nonneman with OKO. Nonneman invested money both personally and through Fencorp, a family investment corporation he formed in 1986. Many of his investments were in domestic oil and gas, but he did not have any experience in drilling wells or running an oil and gas company.

Between 1986 and 2000, Nonneman personally invested a total of $6,520,995 with OKO in oil and gas partnerships and joint ventures. Then, between 2001 and 2003, he substantially increased his rate of investment, investing an additional $8,383,046 with OKO in his individual capacity.² Evidence showed that Nonneman expected to receive favorable tax treatment for his investments.

During the period in question—2000 to 2003—Nonneman was in his early eighties and was showing signs of dementia and suffering from disabilities. Eventually, Nonneman's family and advisors—concerned that he was incapable of managing his business affairs—arranged, with his consent, for Gregory Nolfi, a trusted business advisor, to assume management of Nonneman's affairs as successor trustee on November 5, 2003.

By this time it had become apparent that the OKO investments were not yielding returns. Nonneman had invested in thirty-three joint ventures and ten limited partnerships. The programs all involved oil and gas exploration—mainly drilling holes to find oil and gas—in the states of Kentucky, Tennessee, and Pennsylvania. Of the one hundred twenty-eight wells drilled, all but eleven were completely dry. The eleven that produced oil did not produce enough to recoup the investment, let alone return a profit to Nonneman.

Upon assuming control, Nolfi and Lois Nonneman, Frederick Nonneman's daughter, began investigating why Nonneman had invested so much money in joint ventures with OKO. Because Nonneman himself was unable to explain why—and in fact was surprised to learn the extent of his investments—Nolfi went to OKO to learn more about the transactions. After failing to obtain satisfactory answers from OKO, Nolfi and Lois Nonneman filed suit in Ohio state court. The state court lawsuit, filed December 22, 2004, alleged undue influence, common law fraud, breach of contract, and breach of fiduciary duty arising from the claim that over 90% of the oil and gas wells drilled by OKO resulted in dry holes.

The Nonneman plaintiffs allege that they first learned of the facts and circumstances giving rise to the federal and state securities claims at issue here during discovery for the state fraud case. The Nonneman plaintiffs learned that William M. Griffith, the founder of OKO, and Carol L. Campbell, Griffith's daughter and the president of OKO during the relevant time period, had been persistent in their pursuit of sales to Frederick Nonneman. In numerous personal letters, Griffith touted the virtues of the drilling joint-ventures and included grandiose promises of rich rewards, promises not tempered by cautions or warnings that the exploratory drilling OKO planned had a low chance of success—less than 10% and sometimes less than 5%. Evidence also showed that Nonneman had grown to trust Griffith and that Griffith exploited that trust by pressing for more investment opportunities, encouraging hurried transactions, and bestowing gifts on Nonneman's wife.

Not only did the investments fail to deliver the promised returns, but also OKO's pricing and other behavior were suspicious. Although the investments were joint ventures and general partnerships, the investment terms provided that if no oil was found, OKO would keep any excess funds invested. As a drilling company, OKO made money by drilling the wells; then, if no oil was found, completion costs would be unnecessary, and OKO would make even more profit because it could keep the remainder of Nonneman's investment. Ostensibly for this reason, OKO did not drill in areas where it was likely to strike oil; one expert testified that OKO's wells had the lowest success rate he had ever seen. Another expert concluded: “[T]he apparent availability of investment capital (and not the discovery of oil and gas reserves) was the moving force in the company's operations, resulting in a flurry of drilling and acquisition activity that totally lacked economic performance.” ³ Additional evidence revealed that OKO had overstated its costs and had billed substantial and unexplained internal overhead, including expenses at restaurants and stores, employment of Griffith's family, and purchases of a personal plane, a house, and horses for Griffith.

After learning these facts, the Nonneman plaintiffs filed federal and state securities claims. With regard to federal claims, the Nonneman plaintiffs initially alleged only a violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). After discovery, the Nonneman plaintiffs learned that OKO had engaged in a general solicitation to sell its investments, rendering it unqualified for the SEC filing exemption it had sought, and they filed a second securities claim under § 12(a)(1) of the Securities Act of 1933, 15 U.S.C. § 77 l(a)(1).

A series of federal and state common law and securities claims were eventually consolidated in the United States District Court for the Northern District of Ohio. Following defendants' motion to dismiss for failure to state a claim, the district court found that many of the § 12(a)(1) claims were barred by the three-year statute of repose. The district court also declined to exercise supplemental jurisdiction over the Nonneman plaintiffs' Ohio state law claims. With only the federal securities claims remaining before the court, the district court denied defendants' motion to dismiss, finding that the complaint adequately pled particularity, scienter, reliance, and loss causation.

After discovery, both parties moved for summary judgment. The district court dismissed the remaining § 12(a)(1) claims as barred by the one year statute of limitations. The court denied defendants' motion for summary judgment, finding that they had merely raised again the arguments previously deemed insufficient in their motion to dismiss and that there remained triable questions of fact. The court also denied plaintiffs' motion for summary judgment.

During trial, the district court ruled that the investments at issue were, as a matter of law, securities under § 2(a)(1) of the Securities Act of 1933. Over defendants' objection, the district court also found that a rescission theory could provide a proper measure of damages for the § 10(b) claims.

The case was tried before a jury. The jury found in favor of the Nonneman plaintiffs on their federal securities claims and determined that the rescission damages amounted to $7,700,723 for the Nonneman plaintiffs. Despite having stated the rescissory damages as over seven million dollars, however, the jury only listed an award of $1,777,909 on its verdict form.

Both parties filed post-trial motions. Defendants brought a Rule 50(b) motion, arguing they were entitled to judgment as a matter of law on the § 10(b) claims. The district court denied their motion. Plaintiffs filed a post-trial motion to alter or amend the judgment, arguing they were entitled to rescissory damages by law. Because the jury stated rescissory damages were $7.7 million but only awarded $1.7 million, plaintiffs asked the court to amend the judgment to $7.7 million. The district court refused, finding that the Nonneman plaintiffs had waived this argument by failing to raise the issue prior to the discharge of the jury as required by Rule 49(b).

This appeal followed.

II.

Defendants raise a number of issues on appeal. They argue (1) that plaintiffs did not plead the securities claims with sufficient particularity, (2) that the district court erroneously denied their motion for summary judgment because plaintiffs failed to present sufficient evidence to support their securities claims, (3) that the district court erred in denying their Rule 50 motions, and (4) that the jury instructions incorrectly stated the law. We address each argument in turn.

Defendants' first two arguments are that plaintiffs did...