Clayton v. Heartland Res. Inc.

Decision Date16 November 2010
Docket NumberCivil Action No. 1:08CV–94–JHM.
Citation754 F.Supp.2d 884
PartiesFrederick P. CLAYTON, Jr., et al., Plaintiffsv.HEARTLAND RESOURCES, INC., et al., Defendants.
CourtU.S. District Court — Western District of Kentucky


H. Wynne James, Joseph A. Woodruff, Rebecca Brinkley, Rhonda S. Kinslow, Tera Rica Murdock, Paula D. Walker, Alyssa M. Leffall, Katie G. Stenberg, Ryan K. Cochran, Tanielle Henriques, Waller, Lansden, Dortch & Davis, LLP, Nashville, TN, for Plaintiffs.David A. Stewart, Bowling Green, KY, pro se.D. Mark Haynes, Bowling Green, KY, pro se.Richard E. Stewart, Bowling Green, KY, pro se.Chris Stewart, Smiths Grove, KY, pro se.Ruth Stewart, Bowling Green, KY, pro se.Emily W. Khatir, Amanda L. Blakeman, Barton D. Darrell, Bell, Orr, Ayers & Moore, PSC, Bowling Green, KY, Eugene N. Bulso, Jr., Steven Anthony Nieters, Leader, Bulso, Nolan & Burnstein, PLC, Nashville, TN, for Defendants.


JOSEPH H. McKINLEY, JR., District Judge.

This matter is before the Court on several motions by Defendant Hunter Durham. Durham has filed a motion for summary judgment against all Plaintiffs based on an election of remedies theory [DN 258] as well as a motion for oral argument [DN 245]. Durham has also filed eight motions for summary judgment against individual Plaintiffs on several overlapping theories. The eight individual motions are against the following parties: George Wolff and GDWP LLC [DN 240]; Peter and Nancy Keim [DN 243]; William R. Siefring Trust [DN 244]; B.L. Lanier & Associates, B.L. Lanier Fruit Company, Sara T. Lanier Irrevocable Trust and Bobby Lanier [DN 247]; Thomas G. Marks Living Trust Date January 13, 1986 [DN 248]; Ken and Anita Brown [DN 249]; Dan and Martha Boyd and Able Fence Company Profit Sharing Plan [DN 252]; Cassidy Hurst and Millennium Realty LLC [DN 253]. Having been fully briefed, these matters are ripe for decision.


In order to grant a motion for summary judgment, the Court must find that the pleadings, together with the depositions, interrogatories and affidavits, establish that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56. The moving party bears the initial burden of specifying the basis for its motion and of identifying that portion of the record which demonstrates the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party satisfies this burden, the non-moving party thereafter must produce specific facts demonstrating a genuine issue of fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247–48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

Although the Court must review the evidence in the light most favorable to the non-moving party, the non-moving party is required to do more than simply show there is some “metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The Rule requires the non-moving party to present “specific facts showing a genuine issue for trial.” Fed.R.Civ.P. 56(e)(2). “The mere existence of a scintilla of evidence in support of the [non-moving party's] position will be insufficient; there must be evidence on which the jury could reasonably find for the [non-moving party].” Anderson, 477 U.S. at 252, 106 S.Ct. 2505. It is against this standard that the Court reviews the following facts.


Heartland Resources, Inc. (Heartland) is a Kentucky corporation that was formed in 2002 by David Stewart and Mark Haynes. Heartland is an oil and gas exploration company that issued Working Interests and partnership interests in a number of offerings sold to the Plaintiffs. Hunter Durham is an experienced securities lawyer of forty-four years, who represented and advised Heartland Resources in the issuance of these securities. Durham's services for Heartland included drafting and reviewing private placement memorandums (PPMs) as well as making himself available to speak with prospective investors, should they have any questions. In this role, Durham drafted and/or reviewed approximately twenty PPMs over a five year period and spoke to at least two investors on the telephone.

Many of the Plaintiffs received these PPMs, although not all investors received a PPM, after being solicited by Heartland. Heartland engaged in a general solicitation process which involved salesmen placing hundreds of unsolicited calls each day. Heartland salesmen also attended at least two investor conferences in search of potential investors. These salesmen were paid a modest salary but were able to receive bonuses based on a profit-sharing plan that compensated the salesmen for revenue generated from the sale of securities to investors. To qualify for the plan, a salesman had to reach certain bench marks that included the number of calls placed, the number of PPMs sent to investors, the number of new clients retained, and the amount of money raised for general or limited partnership activities.

Heartland itself was not a registered securities broker-dealer in the state of Kentucky, which was a violation of Kentucky securities law, and a fact known to Durham. The securities that Heartland was issuing were not registered with the Securities and Exchange Commission or the Kentucky Division of Securities, another fact known by Durham. The consequence of the general solicitation process, the salesmen's remuneration, and the violation of Kentucky securities law was that the securities themselves were neither registered nor eligible for an exemption under either federal or Kentucky law. Therefore, each investor had a right to rescission of his or her investment in Heartland and its issuer partnerships. The PPMs, however, never revealed that the interests being sold were not exempt and were subject to a claim of rescission. In fact, the PPMs specifically stated that the securities being sold were exempted under federal and Kentucky law.

This misrepresentation along with five other misrepresentations and omissions found or not found in the PPMs comprise the basis for the present suit against Durham.1 Specifically, Plaintiffs allege that the PPMs: 1) failed to disclose that in 1998 David Stewart and Mark Haynes, as well as every entity directly and indirectly controlled by them, were prohibited from selling unregistered securities in the state of Wisconsin; 2) misrepresented that in December 2002 an administrative action was filed against Homeland Energy of Kentucky, Inc. (Homeland Energy) by the Kentucky Division of Securities charging fraud and misrepresentation; 2 3) misrepresented that a 2006 cease and desist order issued by the Alabama Securities Division was “temporary”; 4) failed to disclose that in 2006 David Stewart was indicted and pled guilty to federal income tax evasion; 3 5) misrepresented that the personal assets of investors would not be subject to claims of creditors of the Issuing Partnership that were formed as general partnerships; and 6) that the securities were exempt from registration under both federal and Kentucky securities laws.

In February, 2008, counsel for Plaintiffs sent a letter to Durham, as attorney for Heartland, seeking monies paid to Heartland for the completion of twenty-four (24) wells in Knox County, Kentucky, which were never completed or equipped by Heartland. This lawsuit followed. On February 1, 2010, this Court granted the Plaintiffs' motion for partial summary judgment against Heartland and all other defendants, except Durham, on eight counts and found that the Plaintiffs were entitled to rescission of their contracts with Heartland.

III. Discussion

Durham has moved for summary judgment against all Plaintiffs based on an election of remedies theory. Durham has also moved for summary judgment against individual Plaintiffs on several different theories found in eight separate motions. The arguments and defenses advanced in support and opposition to the eight individual motions for summary judgment were in many respects identical. These individual Plaintiffs are all represented by the same attorneys, and although the motions were filed against separate parties, they were all filed at the same time, read, and responded to by the same attorneys. Therefore, all of the Plaintiffs named in the eight separate motions for summary judgment were on notice of the arguments made and had an opportunity to respond to each argument. Due to the nature of the filings and in the interest of judicial economy, the Court sees no reason why its analysis of the arguments raised by Durham in the individual motions should not apply to all of the Plaintiffs named in those eight motions.

A. Election of Remedies

Durham's motion for summary judgment against all Plaintiffs is based on one substantive theory; the election of remedies. Durham contends that because Plaintiffs chose to pursue and were granted the remedy of rescission against all other Defendants, they are now precluded from seeking actual damages against Durham. Durham argues that rescission is not an appropriate remedy against him because he was a non-party to the agreements and is not in privity with Plaintiffs. He states that [b]ecause the plaintiffs have no claim for rescission against Mr. Durham, and because they no longer have a claim for out-of-pocket damages (having made a final election to pursue rescission), the plaintiffs have no viable damage claim against Mr. Durham [and] all claims against him should be dismissed.” (Durham Reply Mot. Summ. J. Against All Pls. 6.) Plaintiffs argue that they are seeking and are entitled to rescission against Durham and that this is not an inconsistent remedy. The Court will first address whether rescission is an appropriate remedy, and then whether the election of remedies doctrine bars Plaintiffs from pursuing actual...

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