Ratner v. Sioux Natural Gas Corp.

• Decision Date: 12 September 1985
• Docket Number: Nos. 82-2309,84-2383,s. 82-2309
• Citation: 770 F.2d 512
• Parties: Blue Sky L. Rep. P 72,295, Fed. Sec. L. Rep. P 92,323, 3 Fed.R.Serv.3d 1275 Lee RATNER and John Zuro, Individually and d/b/a The Grant Company, Plaintiffs-Appellees, v. SIOUX NATURAL GAS CORP. and Sioux Pipeline Corp., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 512

770 F.2d 512

Blue Sky L. Rep. P 72,295, Fed. Sec. L. Rep. P 92,323,

3 Fed.R.Serv.3d 1275

Lee RATNER and John Zuro, Individually and d/b/a The Grant Company, Plaintiffs-Appellees, v. SIOUX NATURAL GAS CORP. and Sioux Pipeline Corp. Defendants-Appellants.

Nos. 82-2309, 84-2383.

United States Court of Appeals Fifth Circuit.

Sept. 12, 1985.

Butler, Binion, Rice, Cook & Knapp, Hayden Burns, Eliot Shavin, Houston, Tex., for defendants-appellants.

William E. Wright, Peter B. Camp, Houston, Tex., for plaintiffs-appellees.

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

Before RUBIN, WILLIAMS and DAVIS, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

The district court adjudged defendants Elliott H. Powers and J.F. Freel, and defendants-appellants Sioux Natural Gas Corporation (Sioux) and Sioux Pipeline Corporation (Sioux Pipeline) liable, in an amount exceeding $18 million, for the securities and common law fraud that a jury found they practiced upon plaintiffs-appellees Lee Ratner, John Zuro, and the Grant Corporation. Holding that plaintiffs did not "purchase" a security, we reverse the judgment to the extent it imposed liability for securities fraud and render judgment on those claims in favor of appellants. We also hold that insufficient evidence supported at least one of the six theories under which the jury found under a general charge that defendants committed common law fraud. We accordingly remand for a new trial on the common law fraud claim. Other issues we treat as they arise.

I.

The transaction that generated this suit involved some 120,000 mineral leasehold acres of gas-producing property in Central Texas. Ratner and Zuro held the leases through their partnership, the Grant Company (Grant Partnership), and they owned 100% of the working interest in the wells on the property. Production proved unprofitable, however, and in late 1973, the Grant Partnership, Ratner, and Zuro began to negotiate a sale to Powers and Freel, who had invested in Grant's development efforts. The discussions produced a written agreement in November 1974. The contract required Powers and Freel to take over plaintiffs' lease obligations, to dismiss a lawsuit they had brought against plaintiffs, to assume $2.4 million of plaintiffs' indebtedness to others, and to pay plaintiffs 25% of the net profits from production after Powers and Freel took $3.5 million off the top. In return for the promises, plaintiffs transferred ownership of the leases and of associated personal property to Sioux, which Powers and Freel had created for purposes of taking title. The agreement conditioned the right of Powers and Freel "to sell, convey, farmout, mortgage, pledge or otherwise deal with any of the Properties" by requiring them to exercise the power "in good faith" and to include the amount they received upon selling any of the properties in calculating plaintiffs' share of net profits. Sioux and Sioux Pipeline, which Sioux later spun off, had no shareholders, officers, or directors other than Powers and Freel.

Performance of the agreement by Powers and Freel disappointed plaintiffs. Although they marketed production and spent about $13 million in drilling new wells, dropped their pending action against plaintiffs, and eventually discharged the $2.4 million in debt, Powers and Freel paid nothing to plaintiffs under the 25% net profits interest. Nor did they render the quarterly accountings that the agreement required them to make. The omission deprived plaintiffs of a basis for determining whether production had reached the dollar amount that would have triggered net profits payments. Whether Powers and Freel ever owed any such payments remains uncertain.

More important, according to plaintiffs, Powers and Freel gave several oral assurances prior to execution of the 1974 agreement but did not fulfill them. Plaintiffs allege that Powers and Freel promised to keep the 120,000 leasehold acres substantially intact, to develop the properties generally in accordance with a pre-existing formula, and to take no more than $2,500 each per month as compensation for managing the properties. Plaintiffs also contend that Powers represented that he had or could get enough money to pay the $2.4 million debt and to drill new wells. The evidence, plaintiffs argue, showed that Powers did not have sufficient funds available, that he and Freel attempted to dismember the acreage, that they deviated greatly from the development formula, and that they paid themselves monthly management fees vastly in excess of $2,500 each.

Plaintiffs did not learn of the transgressions until after they sued for an accounting in state court. The knowledge they gained, however, led them to believe that Powers and Freel never intended to carry out their written and oral undertakings. In the summer of 1977, counsel for plaintiffs deposed a Mrs. Davis, who served as secretary to Powers and Freel. Her testimony revealed that, shortly after they executed the 1974 agreement, Powers and Freel had contracted to sell 60% of the working interest in the leases free and clear of plaintiffs' 25% net profits interest. According to plaintiffs, the deal violated Powers' and Freel's promise to transfer the leases in good faith and breached their oral promise to maintain the leases generally as a unit. The transaction, plaintiffs urge, demonstrated that Powers and Freel had fraudulently induced plaintiffs into signing the 1974 agreement.

Plaintiffs brought this action on November 25, 1977. The complaint charged Powers, Freel, Sioux, and Sioux Pipeline with violating federal and state securities law ¹ and with committing common law fraud. Plaintiffs sought rescission of the 1974 agreement, recovery of the leases, and exemplary damages.

A pre-trial ruling allowed amendment of the complaint to substitute the corporate successor of the Grant Partnership as the real party in interest. Ratner and Zuro had incorporated their partnership and assigned to the corporation any claims they had against defendants before they filed this suit, but on January 11, 1977, the Grant Corporation authorized them to prosecute any claim it had against defendants. Grant Corporation also ratified Ratner's and Zuro's representation of its interests during the pendency of this action in August 1980.

After a nine-day trial, the jury found defendants guilty of common law fraud and of fraud under section 33 A(2) of the Texas Securities Act (TSA) and section 12(2) of the Securities Act of 1933 (1933 Act). See Tex.Rev.Civ.Stat.Ann. art. 581-33 A(2) (Vernon 1964); 15 U.S.C. Sec. 77l (2) (1982). The jury awarded plaintiffs $11.9 million in actual damages and $1.1 million in punitive damages. The district court entered judgment upon the jury's findings, holding the defendants jointly and severally liable to the Grant Corporation in the amount of $18,385,307.80, which included $5,385,307.80 in pre-judgment interest. Defendants appealed.

A settlement between plaintiffs and Powers and Freel during the pendency of the appeal prompted us to postpone reaching the merits. The settlement agreement released Powers and Freel from further liability on the judgment, and we accordingly dismissed the appeal as to them. Because the record did not show whether the settlement had satisfied the entire judgment, however, we remanded the case for determination of whether the settlement had mooted the appeal as to Sioux and Sioux Pipeline. See 719 F.2d 801 (5th Cir.1983). On remand the district court found that the judgment remained unsatisfied, and we reinstated the appeal. We now reach the merits.

II.

Ratner, Zuro, and the Grant Corporation (appellees) again assert that post-judgment events have mooted the appeal, but they now allege a different theory. On November 16, 1982, Sioux and Sioux Pipeline (appellants) filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. ² The bankruptcy proceedings, appellees contend, leave them no hope of collecting the rest of their judgment, and they argue that the impossibility of recovery moots the appeal. Because the Constitution restricts exercises of the judicial power to "Cases" and "Controversies", ³ appellees conclude, we must dismiss the appeal without disturbing the judgment.

We see no merit in the argument. Difficulties in formulating a remedy in an otherwise living case do not evidence the absence of a case or controversy. Goosby v. Osser, 409 U.S. 512, 517 n. 5, 93 S.Ct. 854, 858 n. 5, 35 L.Ed.2d 36 (1973) ("Insofar as the single judge may have rested his finding of the absence of a case or controversy on the alleged difficulty of formulating a remedy, he also erred."); Consumers Union of the United States v. Consumer Product Safety Commission, 561 F.2d 349, 354 n. 26 (D.C.Cir.1977) (quoting Goosby ). Thus, the mere possibility that a judgment debtor lacks the means to satisfy its monetary liability does not kill the issues in a case. An indigent defendant otherwise could defeat any lawsuit simply by asserting that his poverty moots the claims against him. Because appellees may collect on it, the judgment "continues to have an impact on the parties such that the case remains alive." Firefighters Local Union No. 1784 v. Stotts, --- U.S. ----, ----, 104 S.Ct. 2576, 2583, 81 L.Ed.2d 483 (1984). As a matter of law, therefore, the possibility that bankruptcy proceedings will result in a reorganization plan that frustrates appellees' efforts to recover from appellants does not render the case moot. ⁴

A finding of mootness would not, in any event, entitle appellees to the relief they apparently want. The mooting of a case pending on appeal does not herald apotheosis of the judgment. On the contrary, to avoid the likelihood that someone will invoke the res judicata or other precedential effect that the judgment would otherwise have, we generally direct the district court to dismiss the suit. E.g., United States v....