Cowles v. Dow Keith Oil & Gas, Inc.

• Decision Date: 16 January 1985
• Docket Number: No. 83-1464,83-1464
• Citation: 752 F.2d 508
• Parties: Blue Sky L. Rep. P 72,160, Fed. Sec. L. Rep. P 91,910 R.S. COWLES and Gloria B. Cowles, Plaintiffs-Appellants, v. DOW KEITH OIL & GAS, INC., an Oklahoma Corporation, and Dow Keith, Individually, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 508

752 F.2d 508

Blue Sky L. Rep. P 72,160, Fed. Sec. L. Rep. P 91,910

R.S. COWLES and Gloria B. Cowles, Plaintiffs-Appellants, v. DOW KEITH OIL & GAS, INC., an Oklahoma Corporation, and Dow Keith, Individually, Defendants-Appellees.

No. 83-1464.

United States Court of Appeals Tenth Circuit.

Jan. 16, 1985.

Michael W. Thom and Jimanne H. Mays of Speck, Philbin, Fleig, Trudgeon & Lutz, Oklahoma City, Okl., for plaintiffs-appellants.

Robert W. Pittman, Oklahoma City, Okl., for defendants-appellees.

Before BARRETT, DOYLE and McKAY, Circuit Judges.

BARRETT, Circuit Judge.

After examining the briefs and the appellate record, this three-judge panel has determined unanimously that oral argument would not be of material assistance in the determination of this appeal. See Fed.R.App.P. 34(a); Tenth Circuit R. 10(e). The cause is therefore ordered submitted without oral argument.

This action was initiated by Appellants, R.S. Cowles and Gloria B. Cowles (the Cowles), against Appellees, Dow Keith and Dow Keith Oil & Gas, Inc. (Dow Keith Corp.), for alleged violations of state and federal securities acts, breach of contract, and conversion arising out of the sale to the Cowles of working interests in oil and gas wells located in Oklahoma. From a judgment entered in favor of Dow Keith and Dow Keith Corp. following a nonjury trial, the Cowles appeal.

Most of the facts relevant to this appeal were stipulated to by the parties and incorporated into the district court's Findings of Fact and Conclusions of Law. Those facts will be briefly summarized.

In 1980 and 1981, the Cowles purchased fractional, or "working," interests from Dow Keith Corp. in three oil and gas leases: the Fuqua lease; the Gibbs lease; and the Smith lease. These interests constitute "securities" as defined in the Oklahoma Securities Act (OSA), the Federal Securities Act of 1933 (FSA), and the Federal Securities Exchange Act of 1934 (FSEA). These interests were not, however, ever registered with either the Oklahoma Securities Commission or the Federal Securities Exchange Commission. Also, neither Dow Keith nor Dow Keith Corp. was registered at the time these interests were sold to the Cowles in any capacity--broker, agent, or otherwise--with either the Oklahoma Securities Commission or the Federal Securities and Exchange Commission. Dow Keith Corp. was the "issuer" of the securities sold to the Cowles and Dow Keith was a "control person" with regard to such sales as those terms are defined in the OSA, the FSA, and the FSEA.

Neither Dow Keith nor Dow Keith Corp. ever performed or obtained any geological studies with respect to wells drilled or to be drilled on these leases. Consequently, investors, including the Cowles, were never provided any geological data with regard to these wells. Some of the investors in these leases resided outside the State of Oklahoma at the time they purchased fractional interests, and both the mails and the telephone system were used in the sale of working interests in the Fuqua, Smith, and Gibbs leases.

Based on these facts and others that will be developed, the Cowles brought suit against Dow Keith and Dow Keith Corp. alleging violations of Section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. Sec. 78j(b) (1976), and Rule 10b-5 promulgated thereunder, 17 C.F.R. Sec. 240.106-5; Section 12(2) of the Securities Act of 1933, as amended, 15 U.S.C. Sec. 77 l (2) (1976); Sections 408(a)(1) and 408(a)(2) of the Oklahoma Securities Act, 71 Okla.Stat. Sec. 408 (1983); breach of contract; and conversion. The district court found that the Cowles had not sustained their burden of proof under either of the Securities Acts. It also resolved the breach of contract and conversion claims against the Cowles.

On appeal, the Cowles challenge a number of the district court's findings. It will, therefore, be instructive for us to set forth the standards to be employed when reviewing such findings. An appellate court must view the evidence adduced in the trial court in the light most favorable to the prevailing party. Joyce v. Davis 539 F.2d 1262, 1264 (10th Cir.1976). Where trial is to the court, as it was here, the resolution of factual issues and conflicting evidence lies solely within the province of the district court. Harmon City, Inc. v. United States, 733 F.2d 1381, 1385 (10th Cir.1984). Such findings, even when they involve expert testimony, are presumptively correct and should not be set aside on appeal unless they are clearly erroneous. Colon-Sanchez v. Marsh, 733 F.2d 78, 80-81 (10th Cir.1984). A finding of fact is "clearly erroneous" if it is without factual support in the record, Farmers & Bankers Life Ins. Co. v. Allingham, 457 F.2d 21, 24 (10th Cir.1972), or if the appellate court, after reviewing all the evidence, is left with a definite and firm conviction that a mistake has been made. Clancy v. First Nat'l Bank of Colorado Springs, 408 F.2d 899, 903 (10th Cir.1969), cert. denied, 396 U.S. 958, 90 S.Ct. 430, 24 L.Ed.2d 422 (1969).

The Cowles maintain that the district court erred in finding that the fractional interests (securities) sold to them by Dow Keith Corp. were exempted from the registration requirements of OSA. ¹ Specifically, they contend that Dow Keith and Dow Keith Corp. did not satisfy each of the elements of 71 Okla.Stat.Ann. Sec. 401(b)(15) (1983) ² as to each investor in the Fuqua, Smith, and Gibbs leases. While it is true that establishing an exemption is an affirmative defense under Oklahoma law, State v. Hoephner, 574 P.2d 1079, 1081 (Okl.Cr.1978), the district court found, as the Cowles concede, that Dow Keith and Dow Keith Corp. had brought themselves within Sec. 401(b)(15). Therefore, we cannot disturb the district court's finding unless it is clearly erroneous.

The Cowles' argument apparently is that the district court's finding that the sales of working interests were exempt was clearly erroneous because Sec. 401(b)(15)A 1, 2, and 4 were not sufficiently established. The Cowles contend subsections 1 and 4 were not satisfied because Dow Keith and Dow Keith Corp. did not prove they reasonably believed each buyer was purchasing for investment and that each buyer was capable of evaluating and able to bear the risks of the investment. We disagree. As the district court recognized, this is not a typical securities fraud case in that the Cowles and the other investors initially contacted Dow Keith seeking to invest, rather than the reverse. Finding of Fact # 16. Several of the investors, including the Cowles, learned about Dow Keith and his operations from Mr. Cowles' dentist, Dr. Ralph Shadid, who already was one of Dow Keith's investors when the Cowles learned of Dow Keith's operations. R.Vol. IV at 20-21; 121-127. These facts, together with the following testimony of Dow Keith on cross-examination, convince us that Dow Keith could reasonably have believed the buyers were purchasing for investment and were able to evaluate and bear financially the risks of those investments:

Q (Mr. Pittman): Have you ever sold any of these interests by installment?

A (Dow Keith): No.

Q So that ...

A You're talking about installment over a period of months?

Q Yes.

A No.

Q So that you did have an indication from all of these people that they had the cash to pay for the interests that they wanted to buy.

A I did.

Id. at 157.

The Cowles argue that Sec. 401(b)(15)A 2 was also not established by Dow Keith and Dow Keith Corp. It was admitted that costs charged by Dow Keith and Dow Keith Corp. to drill and complete certain wells were excessive. The Cowles contend these overcharges were disguised commissions. The district court found, and based on our review of the record we agree, that these overcharges "were inadvertent and unintentional and were corrected when discovered and resulted in no damage to the [Cowles]." Finding of Fact # 21. As such, they were not "disguised commissions" as alleged by the Cowles. Consequently, we hold that the district court's finding that the sales of working interests here involved were exempt from registration under OSA was not clearly erroneous.

For similar reasons, we agree with the district court's finding that there was no public offering triggering the registration requirements of the Federal Securities Acts. In G. Eugene England Found. v. First Fed. Corp., 663 F.2d 988, 990 (10th Cir.1973), this Court stated that "[i]n determining what constitutes a public offering, ... 'the general criterion is whether the particular persons affected stand in need of the protection of the Act,' " quoting Garfield v. Strain, 320 F.2d 116, 119 (10th Cir.1963). As noted above, the district court found this not to be a typical securities case because the investors contacted Dow Keith initially. The district court further found that, because Dow Keith conducted "a minor operation" drilling only "shallow wells," the Cowles "had about as much means of acquiring information and knowledge as did the defendant." Finding of Fact # 18. We believe there is ample support for these findings in the record. Thus, we agree that the Cowles were not persons in need of the protections of the Securities Acts. Consequently, we hold that the district court's finding that there was no public offering was not clearly erroneous.

As noted earlier, Dow Keith and Dow Keith Corp. did not provide any of the investors, including the Cowles, any geological or similar data with respect to wells drilled or to be drilled on the leases involved here. The Cowles contend that failure to provide such information constitutes omission of a "material fact" in violation of Rule 10b-5, 17 C.F.R. Sec. 240.10b-5. The district court found, and we agree, however, that although geological and similar data might be "material" if Dow Keith were a "big operator drilling deeper holes," such information was not material under the facts of this case. Involved here was a small operator conducting a minor operation...