7547 Corp. v. Parker & Parsley Development Partners, L.P.

• Decision Date: 18 November 1994
• Docket Number: No. 93-1880,93-1880
• Parties: Fed. Sec. L. Rep. P 98,460 7547 CORPORATION and Sonem Partners, L.P., Plaintiffs-Appellants, v. PARKER & PARSLEY DEVELOPMENT PARTNERS, L.P. et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 211

38 F.3d 211

Fed. Sec. L. Rep. P 98,460

7547 CORPORATION and Sonem Partners, L.P., Plaintiffs-Appellants, v. PARKER & PARSLEY DEVELOPMENT PARTNERS, L.P. et al Defendants-Appellees.

No. 93-1880.

United States Court of Appeals, Fifth Circuit.

Nov. 18, 1994.

Roger F. Claxton, Kilgore & Kilgore, Dallas, TX, Zachary Alan Starr, New York City, for appellants.

Lewis Titus LeClair, Lori Ann Leu, Johnson & Wortley, Dallas, TX, for appellees.

Appeal from the United States District Court for the Northern District of Texas.

Before KING, JOLLY and STEWART, Circuit Judges.

KING, Circuit Judge:

The plaintiffs-appellants challenge the district court's summary adjudication of their claims under federal and state securities laws and under the common law for breach of fiduciary duty, waste, and conversion, based upon its conclusion that the plaintiffs lacked the requisite standing to pursue those claims. We affirm the trial court's disposition of the state law claims and the claim for violation of federal proxy laws, but reverse its judgment with respect to the remaining federal securities claims.

I. Background

The plaintiffs, 7547 Corporation ("7547 Corporation") and Sonem Partners, L.P. ("Sonem") (together referred to as the "plaintiffs"), were the beneficial owners of units in a limited partnership known as Parker & Parsley Development Partners, L.P. ("PDP"), an oil and gas master limited partnership organized under the laws of the State of Texas and listed on the American Stock Exchange. PDP established operations in December 1987 through the exchange of 3.9 million units for interests in 32 oil and gas limited partnerships. As of March 30, 1990, the number of PDP units outstanding had risen to 5.2 million. PDP was apparently managed by its sole general partner, Parker & Parsley Development Corporation ("PPDC"), which was in turn owned by Southmark Corporation ("Southmark"). PPDC sponsored several public development drilling partnerships from which it received substantial management fees and operating revenues. PPDC also received promotional interests in the partnerships in exchange for its services.

In 1989, Southmark provided severance packages to its two top officers which included the option to acquire PPDC for the higher of book value or appraisal value by April 24, 1989. In the event these two officers did not exercise the purchase option, nine other PPDC officers--including the individual defendants, Scott D. Sheffield ("Sheffield"), Herbert C. Williamson, III ("Williamson"), and Timothy M. Dunn ("Dunn")--were granted an option to purchase PPDC within 80 days. These officers will be referred to collectively as the "management group." The purchase option eventually inured to the management group, but, as they were unable to obtain third-party financing for the transaction, they could not complete the purchase. The plaintiffs claim that the individual defendants consequently devised an elaborate scheme whereby they could effectively obtain the benefits of PPDC ownership--i.e., a substantial portion of its income--without personally having to purchase it. The remainder of events described below are alleged to have been conceived and precipitated by these individuals in furtherance of the scheme, and, as noted below, we review these allegations in a light most favorable to the non-movant plaintiffs.

A. The Stock Purchase Scheme

In May of 1989, Southmark and certain of its affiliates entered into a stock purchase agreement (the "purchase agreement") with PDP, PPDC, and Parker & Parsley, Ltd. ("P & P Ltd.") for the purchase of PPDC's outstanding stock. The agreement was subsequently consummated as follows: PPDC transferred its general partnership interest in PDP to P & P Equity, which in turn was managed by PPDC as general partner. P & P Ltd. then acquired PPDC's general partnership interest in P & P Equity. JM Petroleum Corporation ("JM"), the sole limited partner of P & P Ltd., provided the financing for the transaction and received in exchange a profits interest in P & P Ltd. and a $3 million liquidation preference. According to documents filed with the Securities and Exchange Commission ("SEC"), P & P Ltd. used $2 million of the JM financing to acquire PPDC's general partnership interest in P & P Equity, and P & P Equity in turn caused PDP to acquire all of the outstanding stock in PPDC for an aggregate price of $52.6 million. The plaintiffs contend that the purchase price also included the assumption of a $16.8 million debt. At the proverbial end of the day, (i) PDP had purchased its own general partner, PPDC, (ii) P & P Equity was the sole general partner of PDP, (iii) P & P Ltd was the sole general partner of P & P Equity, and (iv) Midland Management Partners, L.P. ("Midland") was the sole managing general partner of P & P Ltd.

The plaintiffs point out that P & P Equity is a Texas limited partnership whose sole limited partner is Spraberry Development Corporation ("SDC"), an entity owned by the individual defendants. SDC is also a non-managing general partner of P & P Ltd. Further, the individual defendants are general partners of Midland. The plaintiffs claim that the interrelationship between these entities has allowed the individual defendants to gain control of PPDC and its substantial income.

Additionally, the defendants allegedly caused PDP to engage in transactions with its affiliates which were much less favorable to PDP than would have been received in arms-length transactions. Specifically, on May 24, 1989, P & P Ltd. entered into a master crude oil purchase agreement (the "crude oil agreement") with JM, its sole limited partner, which required P & P Ltd. and all of the entities controlled by P & P Ltd. to sell all crude oil (including condensate) which any of the entities had the right to market after the effective date of the agreement, July 1, 1989. The price agreed upon in the crude oil agreement was to be a monthly weighted average price per barrel equal to JM's posted price for crude oil of the same type and quality produced from the same field or area, plus, at P & P Ltd.'s option, a supplemental payment of five cents per barrel or a letter of credit to secure payment. This price is contended to be significantly below the price that could have been obtained on the open market and has allegedly injured PDP, which sold over $5 million of oil to JM in the second half of 1989 alone and approximately 65% of the crude oil it produced in 1990.

B. The Limited Partnership Revenues

During the 1980s, PPDC sponsored several oil and gas drilling programs. By mid-1989, the eighteen limited partnerships organized under PPDC's eight public programs had raised approximately $258 million of capital from subscribers. PPDC also sponsored 5 private partnerships raising approximately $35 million in capital during the period between 1985-88. As sponsor and managing general partner of these partnerships, PPDC received substantial management and operation fees, as well as revenues from its promotional interests in the partnerships.

In mid-1989, PPDC and P & P Ltd. jointly offered a ninth series of public programs via a prospectus dated August 1, 1989 (the "ninth series"). Under the joint arrangement, PPDC and P & P Ltd. agreed to share management fees and other compensation and reimbursement. P & P Ltd. was to contract with PPDC to perform the operating services for which PPDC would be reimbursed at cost--i.e., less than 50% of the total compensation and reimbursement. Liabilities for organization and offering expenses exceeding two and one-half percent of aggregate initial partner contributions were allocated entirely to PPDC. The plaintiffs argue that P & P Ltd. will receive tens of millions of dollars in management fees and other compensation, even though the management and operating services will in actuality be performed by PPDC employees.

C. The Roll-Up Scheme

The plaintiffs complain of the proposed transaction whereby the assets, liabilities, and operations of PDP, P & P Ltd., and Damson Oil Corporation and its affiliates ("Damson") were to be combined into a newly-formed corporation, Parker & Parsley Petroleum Company ("P & P Petroleum"), in exchange for stock in the new corporation (the "roll-up transaction" or "transaction"). Under this plan, the Parker & Parsley entities were then to be liquidated in accordance with their respective partnership agreements and the P & P Petroleum stock distributed to the former unitholders of the "rolled-up" partnerships who relinquished their partnership interests. The agreements necessary to effect the transaction--the amended and restated exchange agreement entered into by PDP, P & P Equity, PDP Ltd., Midland, and others (the "exchange agreement") and the plan of consolidation respecting the Parker & Parsley partnerships (the "P & P plan")--were executed in December 1990. Because the transaction required approval by PDP's limited partners, the general partner of PDP solicited their votes on, and recommended approval of, the transaction through a Prospectus/Proxy Statement dated December 31, 1990. The Prospectus/Proxy Statement also delineated the terms of the offering of P & P Petroleum stock.

The parties intended that P & P Petroleum would continue the partnerships' activities of sponsoring public and private oil and gas development drilling and income programs after the roll-up transaction was consummated.

1. Distribution of P & P Petroleum common stock

The Prospectus/Proxy Statement provided that "[e]ach holder of PDP units will receive 2 shares of [P & P Petroleum] Common Stock for each PDP unit [owned] " (emphasis in original), and that P & P Ltd. would receive 2.3 million shares of the common stock (assuming 100% participation) and 1.9 million shares of the common stock (if only the P & P partnerships participated).

The plaintiffs contend that the allocation of stock in the new corporation is unfair to them. Specifically, they claim...