Bold v. Simpson

Decision Date07 November 1986
Docket Number85-1123 and 85-1151,Nos. 85-1113,s. 85-1113
Citation802 F.2d 314
PartiesFed. Sec. L. Rep. P 92,937 Lawrence R. BOLD, Appellant, v. David L. SIMPSON, II, Sharon Simpson and Senergy Petroleum Corporation, Appellees. Lawrence R. BOLD, Appellee, v. David L. SIMPSON, II and Senergy Petroleum Corporation, Appellants, Sharon Simpson. Lawrence R. BOLD, Appellant, v. David L. SIMPSON, II, Sharon Simpson and Senergy Petroleum Corporation, Appellees.
CourtU.S. Court of Appeals — Eighth Circuit

Donald F. Martin and Thomas C. Brown, Kansas City, Mo., for Bold.

Roy Bash, Kansas City, Mo., for Simpson.

Before LAY, Chief Judge, BRIGHT, Senior Circuit Judge, and ROSS, Circuit Judge.

BRIGHT, Senior Circuit Judge.

Lawrence R. Bold brought suit in federal district court against David L. Simpson, Sharon Simpson 1 and the Senergy Petroleum Corporation (Senergy) in connection with Bold's investment in a failed oil and gas venture, the Reed Ranch lease. In his complaint, Bold alleged, inter alia, that Simpson fraudulently induced him to invest in the Reed Ranch venture, negligently managed the investment, and converted Simpson's interests in the Reed Ranch venture. Simpson counterclaimed, alleging that Bold committed legal malpractice through his representation of Simpson in the structuring of the Reed Ranch investment, and Senergy alleged that Bold breached his fiduciary duty as a director of Senergy. After a five-day trial, the jury awarded Bold $5,000 actual damages on the fraud claim, $12,500 actual damages on the negligent management claim, $19,000 actual damages on the conversion claim and $100,000 punitive damages on the conversion claim against both defendants. In addition, the jury awarded Simpson $325,000 actual damages on its counterclaim for legal malpractice, and it awarded Senergy $5,000 actual damages on Senergy's counterclaim for director liability. The district court then entered judgment upon the jury verdicts and ruled on various motions. Both Bold and defendants appeal. For the reasons discussed below, we affirm in part, reverse in part, and remand.

I. BACKGROUND

Lawrence R. Bold is an attorney with the Kansas City law firm of Morris, Larson, King, Stamper & Bold. He practices primarily in the areas of tax, corporate, and real estate law. Bold and David L. Simpson first became acquainted in the early 1970's. Prior to the instant litigation, Bold and Simpson were good friends who associated with each other both socially and professionally. Bold served as Simpson's attorney on a variety of matters. Both men had experience in various business investments, including oil and gas ventures.

In August 1977, Simpson approached Bold about participating in an oil and gas lease prospect, the Reed Ranch lease, which Simpson had located in Chautaqua County, Kansas. Simpson asked Bold to undertake the legal work to form a corporation to handle oil investments, specifically to acquire the Reed Ranch lease. Bold performed the necessary work to incorporate the Senergy Petroleum Corporation, and he also became the secretary and a director of that corporation. Furthermore, Bold provided Simpson with a copy of a prospectus from a previous oil and gas venture in which Bold had invested. Simpson used this prospectus to prepare materials for investors in the Reed Ranch lease.

A major issue of dispute in this case is whether Bold assumed any legal responsibilities beyond incorporating Senergy; that is, whether Bold represented Simpson on the securities issues present in the Reed Ranch venture. Bold testified that he agreed to incorporate Senergy, yet advised Simpson to contact an attorney in Wichita, Kansas, to consider any possible securities issues. He said that he told Simpson that he had no background nor experience in securities law and therefore could not represent him in this area. To the contrary, Simpson testified that Bold did not advise him to seek separate securities counsel. Furthermore, he testified that Bold reviewed the text of the investment documents that Simpson had prepared before they were distributed to other investors. Simpson said that Bold never advised him that the interests in the Reed Ranch lease were securities that must be registered in Missouri. Simpson said that it was his understanding that Bold was representing him in all aspects of the structuring of the Reed Ranch venture.

After the formation of the Senergy Petroleum Corporation, Simpson executed an agreement between it and George Ewonus for the acquisition of the Reed Ranch lease. The agreement stated that Senergy was to pay $150,000 for the lease and that Ewonus would be responsible for operating it. Ronald Joe and Brenda Reed owned the land that was being leased, and they also retained a landowners' royalty payment.

Simpson then put together a group of eleven people, including himself and Bold, to invest in the Reed Ranch lease. 2 Bold's investment amounted to $12,500. In December 1977, Simpson located another lease prospect in Chautaqua County, Reed Ranch A. This second lease was on property owned by the same individuals just south of the original Reed Ranch lease property. Many of the investors in the original Reed Ranch lease also invested in Reed Ranch A. Bold, however, did not participate in this second venture.

Unfortunately, both the Reed Ranch and the Reed Ranch A investments were unsuccessful. Early in 1978, the Reed Ranch lease returned a net distribution of approximately $3500 to the investors, yet from that time on expenses exceeded profits. In fact, by July 15, 1978, the Reed Ranch venture was apparently $8,677 in the red as the cost of operating had exceeded the income produced. At this time, Simpson attempted to convince the investors to contribute some additional funds, yet they decided against it.

The investors became increasingly dissatisfied with the lack of profit and, on December 21, 1978, a meeting was convened to attempt to ascertain the problems and develop a plan. Apparently this meeting proved unsuccessful because in early 1979, a group of Reed Ranch and Reed Ranch A investors, not including Bold, filed suit against Simpson (Spitcaufsky litigation 3 ). The Spitcaufsky litigation plaintiffs alleged various claims against Simpson, including negligent management of the lease, false representations, and non-compliance with federal and state securities laws. These claims were litigated through the discovery stage for almost two years before a settlement agreement was reached on November 26, 1980. Simpson testified that his liability under that agreement was approximately $225,000. In addition, he estimated that the time and effort he had to spend defending the Spitcaufsky litigation cost him $100,000 in lost business opportunities.

As noted above, Bold did not participate in the Spitcaufsky litigation. Bold filed suit against Simpson in federal district court on November 30, 1981, alleging ten separate claims in his complaint. Simpson and Senergy counterclaimed against Bold for legal malpractice and corporate director liability. Simpson alleged damages on these claims in the amount of the Spitcaufsky settlement. He argued that the primary claim in the Spitcaufsky litigation concerned non-registration of securities, and he contended that Bold failed to advise him of the need to register.

Bold's claims against Simpson were essentially that Simpson fraudulently induced him to invest in the Reed Ranch venture, negligently managed the venture, and converted Simpson's interest in the investment. As discussed above, the Reed Ranch venture essentially never made a profit. Because of this, the operator of the lease, George Ewonus, was apparently not being paid consistently, and eventually he walked off the lease and refused to operate it any longer. This apparently happened some time in the early part of 1979. At this point, perhaps March 1979, production on the Reed Ranch lease stopped. In the fall of 1979, the landowner, Ronald Joe Reed, instituted proceedings to take back the lease for non-production. It was at this time that Simpson took a reassignment of the lease, but now in his own name instead of in Senergy's name.

At trial, Bold argued that Simpson's management of the lease during this period was negligent. Furthermore, he asserted that Simpson stopped informing him of events transpiring with the lease once the Spitcaufsky litigation began. The basis to Bold's conversion claim arises out of the reassignment of the lease. There was conflicting testimony on this point at trial. Simpson stated that Mr. Reed required Simpson to take the lease in his (Simpson's) own name and Simpson did so as to retain the lease. Furthermore, Simpson argued that despite taking the lease in his own name, he maintained accounts for the investors. Bold, among other things, pointed to Simpson's utilization of depreciation of the equipment on Simpson's tax returns as evidence that Simpson exercised ownership over the lease and the equipment.

The district court submitted to the jury Bold's fraud, negligent management, and conversion claims, as well as Simpson's and Senergy's respective counterclaims of legal malpractice and corporate director liability. The district court, however, declined to instruct the jury on Bold's claim under Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. Sec. 240.10b-5 (1986), but granted Simpson's motion to dismiss on the 10b-5 claim. In its verdict, as we have noted, the jury awarded Bold $5,000 actual damages on the fraud claim, $12,500 actual damages on the negligent management claim, $19,000 actual damages on the conversion claim, and $100,000 punitive damages on the conversion claim. In addition, the jury awarded Simpson $325,000 actual damages on its counterclaim for legal malpractice, and it awarded Senergy $5,000 actual damages on Senergy's counterclaim for director liability. With this brief background, we turn to the...

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