Maywalt v. Parker & Parsley Petroleum Co.

• Decision Date: 09 December 1992
• Docket Number: No. 92 Civ. 1152 (RWS).,92 Civ. 1152 (RWS).
• Parties: Mary Ann MAYWALT, Mary White, John Vosefski and Vivienne Galligan, J. Richard Aboud DDS, Inc., Defined Benefit Pension Plan, on behalf of themselves and all others similarly situated, Plaintiffs, v. PARKER & PARSLEY PETROLEUM COMPANY, Smith Barney, Harris, Upham & Co., Inc., Barrie M. Damson, William T. Ouzts, Robert F. Carr, III, J. William Pierce, Robert S. Rose, Jerol M. Sonosky, Garth M. Ramsay, Scott D. Sheffield, Herbert C. Williamson, III, Timothy M. Dunn, James D. Moring, Robert J. Castor, A. Frank Kubica, Defendants.
• Court: U.S. District Court — Southern District of New York

808 F. Supp. 1037

Mary Ann MAYWALT, Mary White, John Vosefski and Vivienne Galligan, J. Richard Aboud DDS, Inc., Defined Benefit Pension Plan, on behalf of themselves and all others similarly situated, Plaintiffs, v. PARKER & PARSLEY PETROLEUM COMPANY, Smith Barney, Harris, Upham & Co., Inc., Barrie M. Damson, William T. Ouzts, Robert F. Carr, III, J. William Pierce, Robert S. Rose, Jerol M. Sonosky, Garth M. Ramsay, Scott D. Sheffield, Herbert C. Williamson, III, Timothy M. Dunn, James D. Moring, Robert J. Castor, A. Frank Kubica, Defendants.

No. 92 Civ. 1152 (RWS).

United States District Court, S.D. New York.

December 9, 1992.

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Kaplan & Kilsheimer (Robert N. Kaplan, Richard J. Kilsheimer, of counsel), New York City, Sullivan, Hill, Lewin & Markham (David R. Markham, Michael A. LaBazzo, of counsel), San Diego, CA, Bradford & Decker (Donald R. Bradford, John Decker, of counsel), Tulsa, OK, for plaintiffs.

Stroock & Stroock & Lavan (Melvin A. Brosterman, of counsel), New York City, Johnson & Gibbs, P.C., Dallas, TX, for defendant Parker & Parsley Petroleum Co. Scott D. Sheffield, Herbert C. Williamson, III, Timothy M. Dunn, James D. Moring, Robert J. Castor, and A. Frank Kubica.

Akin, Gump, Hauer & Feld, L.L.P. (Michael P. Lynn, P.C., of counsel), Dallas, TX, Meister Leventhal & Slade (Jeffrey C. Slade, of counsel), New York City, for defendants Barrie M. Damson, William T. Ouzts, Robert F. Carr, III, J. William Pierce, Robert S. Rose, Jerol M. Sonosky and Garth M. Ramsey.

Cahill Gordon & Reindel (Charles A. Gilman, David G. Januszewski, of counsel), New York City, for defendant Smith Barney, Harris Upham & Co., Inc.

OPINION

SWEET, District Judge.

This is an action brought by former investors in limited partnerships against the general partner, the subsequent company created through an exchange agreement which consolidated the Plaintiffs' limited partnerships with other limited partnerships, various individual officers and directors of the general partner and the new company, and the investment banking firm which prepared a fairness opinion regarding the transaction. The Plaintiffs allege claims pursuant to Sections 12(2) and 15 of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. §§ 77a et seq.; Sections 10(b) (and Rule 10b-5) and 20 of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. §§ 78a et seq.; Section 14 (and Rules 14a-6, 14a-9) of the 1934 Act; and pendant state claims of breach of fiduciary duty, negligent misrepresentation, and common law fraud.

The various defendants have moved to dismiss this action pursuant to Rules 12(b)(6) and 9(b), Fed.R.Civ.P., for failure to plead claims for relief, failure to plead fraud with sufficient particularity, and failure to plead sufficient state law claims. For the reasons set forth below, the Defendants' motions are granted in part and denied in part.

The Parties

The Plaintiffs ("Damson Limited Partners") bring this action as individuals and as representatives of a purported class of investors¹ who formerly held limited partnership interests in one or more of five limited partnerships organized by the Damson Oil Corporation ("DOC") and in which DOC served as general partner. These partnerships (collectively, the "Damson Limited Partnerships") were Damson Energy Company, L.P. ("Damson Energy"), Damson Institutional Energy Limited Partnership ("Damson Institutional"), Damson Income Energy Limited Partnership ("Damson Income"), Damson 1983-84 Oil & Gas Income Fund-Series 1985-1 ("Damson 1985-1"), and Damson 1984-85 Institutional Oil & Gas Income Fund-Series 1985E-1 ("Damson 1985E-1").

Defendants Barrie M. Damson, William T. Ouzts, Robert F. Carr, III, J. William Pierce, Robert S. Rose, Jerol M. Sonosky, and Garth M. Ramsay were officers and directors of DOC ("DOC Defendants").

Parker & Parsley Petroleum Company ("PPPC") is the company formed by the consolidation of the Damson Limited Partnerships with certain partnerships and auxiliaries known as Parker & Parsley Development Partners L.P. ("Parsley & Parker Partnerships"), and it is the transaction culminating in the creation of PPPC that gave rise to the claims in this action. Officers and directors of PPPC named as individual defendants are Scott D. Sheffield, Herbert C. Williamson, III, Timothy M. Dunn, James D. Moring, Robert J. Castor, and A. Frank Kubica ("Individual Parker Defendants," and collectively with PPPC, "PPPC Defendants").

Defendant Smith Barney, Harris Upham & Co., Inc. ("Smith Barney"), a corporation incorporated under the laws of the State of Delaware, with its principal place of business in New York City, is an investment banking firm.

Prior Proceedings

The Plaintiffs filed their original Class Action Complaint on February 18, 1992 ("Original Complaint") and their First Amended Class Action Complaint ("Amended Complaint") on February 22, 1992. The action is brought by individual investors for themselves and on behalf of similarly situated members of a putative class, who were limited partners in the Damson Limited Partnerships organized by Defendant Barrie M. Damson, DOC's chairman, with DOC as the managing partner of each Partnership.

The present motions were filed by the PPPC Defendants on April 28, 1992, by the DOC Defendants on May 18, 1992, and by Smith Barney on June 2, 1992. Oral arguments were heard on July 1, 1992, and the motions were considered fully submitted as of that date.

The Facts²

Each of the Damson Limited Partnerships owned interests in oil and gas properties and gas processing plants. Approximately $1.4 billion was invested in the Damson Limited Partnerships by members of the asserted class between 1978 and 1985. The underlying basis of the Plaintiffs' action is a transaction ("Transaction") which was consummated on February 19, 1991 according to the terms and conditions of an exchange agreement ("Agreement") between DOC and Parker & Parsley Development Partners L.P. ("Parsley & Parker Partnerships").

Under the Agreement, the Damson Limited Partnerships would be merged with the Parker & Parsley Partnerships to create PPPC, and the managers of the Parker & Parsley Partnerships were to become officers and directors of PPPC and would control the merged entity, while members of DOC management were to resign and would be paid "severance" payments.

The Agreement was subject to the approval and ratification by the Damson Limited Partners at a special meeting of limited partners ("Special Meeting") scheduled for February 19, 1991, in Dallas, Texas. In order to secure proxies from the Damson Limited Partners to approve the Agreement, PPPC, DOC, and the individual defendants sent the Damson Limited Partners a Prospectus/Proxy Statement ("Original Prospectus") that was issued on December 31, 1990. Attached to the Original Prospectus was a fairness opinion issued by Smith Barney, stating that the Transaction was "fair" to the Damson Limited Partners.

A Supplemental Prospectus ("First Supplement"), dated February 8, 1991, was filed with the Securities and Exchange Commission ("SEC") on February 11, 1991. Three days later, after a Damson investor filed suit in the Supreme Court of New York, alleging that the Agreement's severance payments to be made to DOC management constituted waste and breach of fiduciary duty, the Defendants and DOC filed a second Supplemental Prospectus ("Second Supplement") with the SEC on February 14, 1991.³

The Special Meeting of February 19 was held and Parker & Parsley voted the proxies obtained from the Damson Limited Partners, on the basis of the Original Prospectus and Smith Barney's fairness opinion, thereby consummating the Transaction according to the terms and conditions of the Agreement.

The assets of the Damson Limited Partnerships were consolidated with those of the Parsley & Parker Partnerships to form PPPC, and the stock of PPPC was distributed according to the exchange formula set forth in the Agreement. The end result of the ratification of the Agreement is asserted to be a direct financial loss to the Damson Limited Partners of more than $70 million.

The gravamen of the Plaintiffs' action is that, as a result of the fact that they received the First and Second Supplements either immediately before or after the Special Meeting,⁴ PPPC, DOC, and their directors secured ratification of the Agreement by voting proxies which they had obtained pursuant to the disclosures of the Original Prospectus, and that the Defendants knew those disclosures to be inadequate, incomplete, and misleading.

Discussion

I. Legal Standards

A. Rule 12(b)(6)

On a Rule 12(b)(6) motion to dismiss, the factual allegations of the complaint are presumed to be true and all factual inferences must be drawn in the plaintiffs' favor and against the defendants. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir.1989); Dwyer v. Regan, 777 F.2d 825, 828-29 (2d Cir.1985). Accordingly, the factual allegations considered here and set forth below are taken from the Plaintiffs' Amended Complaint and do not constitute findings of fact by the Court. They are presumed to be true only for the purpose of deciding the present motions.

Rule 12(b)(6) also imposes a substantial burden of proof upon the moving party. A court may not dismiss a complaint unless the movant demonstrates "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitled him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). Accord Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984) (quoted in H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 249-50, 109 S.Ct. 2893, 2906, 106 L.Ed.2d 195 (1989)).

In the event that a plaintiff alleges a claim based on a...