Fencorp, Co. v. Ohio Kentucky Oil Corp.

• Citation: 82 Fed.R.Serv.3d 89,675 F.3d 933
• Decision Date: 04 April 2012
• Docket Number: 09–4322.,Nos. 09–4317,09–4321,09–4320,s. 09–4317
• Parties: FENCORP, CO., Plaintiff–Appellee/Cross–Appellant, v. OHIO KENTUCKY OIL CORPORATION; Carol L. Campbell, Defendants–Appellants/Cross–Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

675 F.3d 933

82 Fed.R.Serv.3d 89

FENCORP, CO., Plaintiff–Appellee/Cross–Appellant,

v.OHIO KENTUCKY OIL CORPORATION; Carol L. Campbell, Defendants–Appellants/Cross–Appellees.

Nos. 09–4317

09–4320

09–4321

09–4322.

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 Appellee. 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 Appellee.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 plaintiff-appellee Fencorp, Co. (“Fencorp”), defendants-appellants Ohio Kentucky Oil Corporation (“OKO”) and Carol L. Campbell appeal and raise numerous issues. Fencorp cross-appeals and raises two additional issues. For the reasons that follow, we reverse the district court's entry of judgment on damages but otherwise affirm its rulings.

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 these investments were in domestic oil and gas although Nonneman had no experience in drilling wells or running an oil and gas company.

From 2000 to 2003, Nonneman, who was president of Fencorp until 2004, when his daughter, Lois Nonneman, succeeded him, invested $3,980,345.50 with OKO through Fencorp, of which $1,012,835.50 was invested after March 6, 2001 (the relevant date for the Ohio five-year securities statute of repose). The investments included twenty-one joint ventures and five limited partnerships. Evidence showed that Nonneman expected to receive favorable tax treatment.

During the time period in question, Nonneman was showing the beginning signs of dementia and suffering from disabilities. Eventually, Gregory Nolfi, a trusted business advisor, assumed management of Nonneman's affairs as successor trustee on November 5, 2003. By this time it had become apparent that the OKO investments would yield no returns. Of the one hundred twenty-eight wells drilled by OKO, only eleven produced oil, and they did not produce enough to recoup the investment, let alone return a profit to Fencorp, even taking account of tax benefits.

Upon assuming control, Nolfi went to OKO to learn more about the transactions. He was unsuccessful, and Nolfi and Lois Nonneman filed suit in Ohio state court. The state court lawsuit on Nonneman's personal behalf was filed December 22, 2004. Fencorp was not named as a plaintiff in this suit.

During discovery for the state lawsuit, Nolfi and Lois Nonneman learned of facts and circumstances that gave rise to federal and state securities claims. Fencorp's representatives 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. 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. Evidence 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.

Griffith thus persuaded Nonneman to invest over three million dollars with OKO through Fencorp, but the investments failed to return as promised. Moreover, OKO's pricing and other behavior were suspicious. The terms of the investments provided that if no oil was found, OKO would keep the 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. 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, Nolfi and Lois Nonneman filed federal and state securities claims on Nonneman's personal behalf. About a month after the federal lawsuit on Nonneman's personal behalf was filed, on March 6, 2006, Fencorp filed a case against OKO and Carol L. Campbell alleging (1) violations of § 12(a)(1) of the Securities Act of 1933, 15 U.S.C. § 77 l(a)(1), (2) violations of the Ohio Blue Sky laws by the sale of unregistered securities, (3) federal securities fraud, (4) misrepresentation, (5) common law fraud, (6) breach of fiduciary duties, and (7) breach of contract. Fencorp also sought punitive damages. Although the district court declined to exercise supplemental jurisdiction over Nonneman's personal state law claims, it retained jurisdiction over Fencorp's state law claims. On March 23, defendants moved to consolidate the two federal cases, which the district court granted on May 9, 2006. Both Nonneman's personal claims and Fencorp's claims against OKO and other defendants were therefore tried together. Appeals from the two cases have proceeded separately.

The district court ruled on several pre-trial motions relevant to this appeal. First, the district court dismissed many of Fencorp's § 12(a)(1) non-registration claims as being beyond the three-year statute of repose, and the court found that equitable tolling did not apply. In addition, 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. First, the district court dismissed the remaining § 12(a)(1) claims for being outside the one-year statute of limitations. Second, the court denied summary judgment to Fencorp on its Ohio non-registration claims on the ground that whether OKO's securities were exempt was a question of fact. Third, the court denied defendants' § 10(b) summary judgment motion. Fourth, the court dismissed Fencorp's Ohio Blue Sky claims from prior to March 6, 2001, as being beyond the statute of repose, but it refused to dismiss claims filed between March 6, 2001, and March 6, 2002 because the statute of repose, which was four years at the time the investments were sold but had been changed to five years by the Ohio General Assembly, only creates a substantive right once the limitation period has run. Fifth, the district court rejected defendants' argument that federal law preempted Fencorp's Blue Sky claims because whether defendants' products were rightfully exempt from registration under SEC Rule 506 depended on whether OKO had engaged in a “general solicitation,” a question of fact. Finally, the district court denied defendants' motion for summary judgment on the state law breach of contract claim. Defendants had argued that a “general accounting” between partners must take place before such a claim could be brought, but the district court found that the partnership interests here were not so complex as to require an accounting before the court could resolve the contractual dispute.

As the case proceeded, OKO thwarted Fencorp's efforts to obtain discovery on whether OKO had engaged in a general solicitation. Not only did OKO refuse to hand over requested documents, but also one of its executives admitted that OKO had destroyed some of the documents Fencorp had requested for the case. OKO did not institute a “litigation hold” on these documents during the state and federal lawsuits. The district court found that defendants had violated a discovery order: “[T]he defendants failed to even investigate the existence of documents that would have been responsive to discovery requests. The Court does not impose sanctions lightly. The underlying misconduct, however, warrants it.” Accordingly, under Fed.R.Civ.P. 37(b), the district court sanctioned defendants by finding, as a matter of law, that OKO had engaged in a general solicitation. This decision meant that OKO's federal preemption defense under Rule 506 was rendered inapplicable.

The district court made a number of other additional rulings during trial. First, the district court ruled on a Rule 50 motion that the investments at issue were, as a matter of law, securities under Ohio Revised Code § 1707.01(B) and § 2(a)(1) of the Securities Act of 1933. The court also found that the violation was “material.” But the court did not grant judgment as a matter of law because whether OKO had “knowingly” sold unregistered securities remained uncertain. Also, over defendants' objection, the court offered rescission damages in its jury instructions as a measure of damages for the § 10(b) claims.

The case was tried before a jury, and the jury ruled in favor of Fencorp on its federal securities claims. The jury then determined that the rescission damages—the price paid for the investments, less any income received—were $3,591,605 for Fencorp. Having stated the rescissory damages as over three million dollars, the jury then entered $847,858 on its verdict form as the total amount of damages for Fencorp.

On the Ohio state non-registration claim, the jury found for Fencorp, but it only awarded $735,496, substantially less than full rescission. The jury found for Fencorp on its state securities fraud claim but...