Feldman v. Pioneer Petroleum, Inc.

• Citation: 606 F. Supp. 916
• Decision Date: 28 February 1985
• Docket Number: No. CIV 77-0012-R.,CIV 77-0012-R.
• Court: U.S. District Court — Western District of Oklahoma
• Parties: Jerome I. FELDMAN, et al., Plaintiffs, v. PIONEER PETROLEUM, INC., Frontier Corporation, The Estate of William D. Bradford, John H. Burgher, Fidelity Bank, N.A., The Estate of Grady D. Harris, Arthur Young & Company and James L. Houghton, Defendants.

606 F. Supp. 916

Jerome I. FELDMAN, et al., Plaintiffs, v. PIONEER PETROLEUM, INC., Frontier Corporation, The Estate of William D. Bradford, John H. Burgher, Fidelity Bank, N.A., The Estate of Grady D. Harris, Arthur Young & Company and James L. Houghton, Defendants.

No. CIV 77-0012-R.

United States District Court, W.D. Oklahoma.

February 28, 1985.

Edward Labaton, Goodkind, Weschsler, Labaton & Rudoff, New York City, R.C. Jopling, Jopling & Blankenship, Oklahoma City, Okl., for plaintiffs.

Edward Little, White & Case, Martin Obermaier & Morvill, Silberfeld, Danziger & Bangser, New York City, James P. Linn, James A. Kirk, J.D. Helms, William P. Warden, Linn, Helms, Kirk & Burkett, J. William Conger, Hartzog, Conger & Cason, William G. Paul, Harry A. Woods, Jr., Brooke Smith Murphy, Michael M. Stewart, Earl A. Skarky, Crowe & Dunlevy, Oklahoma City, Okl., John Matson, New York City, Burck Bailey, Fellers, Snider, Blankenship, Bailey & Tippens, Oklahoma City, Okl., J. Stephen Welch, John H. Burgher, Jr., Schuman & Welch, P.C., Tulsa, Okl., for defendants.

ORDER

DAVID L. RUSSELL, District Judge.

This action was commenced in 1976 in the United States District Court for the Southern District of New York and was subsequently transferred by agreement to the Western District of Oklahoma. The complaint seeks legal damages or in the alternative rescission and restitution based on violations of Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5, and common law fraud. Initially, the Court determined that this case could be maintained as a class action. The class, however, was subsequently decertified, and the suit is now brought by some seventy investors who acquired limited partnership interests in the 1972 oil recovery program created by the late William D. Bradford. The sale of interests in the 1972 program was accomplished by Bradford and his fellow promoter, John H. Burgher¹ via the Prospectus,² a document entitled "Confidential Memorandum —William D. Bradford Partnership." This Prospectus was distributed to potential investors in New York and nine other states.

Under the plan as described in the Prospectus, each partnership would consist of Bradford, as the sole general partner, and a number of limited partners. Each partnership was to be divided into two tiers—a first-tier partnership and a second-tier partnership. The limited partners' investment in the first-tier would constitute the partnership's capital and would be used to purchase a working interest in an oil and gas lease from Pioneer Petroleum. The purchase price was intended to cover Pioneer's costs of drilling wells and other expenses. Approximately 90% of the capital contributed by the limited partners would be allocated by Pioneer to "intangible drilling and development costs." This would entitle each limited partner to deduct 90% of his investment for income tax purposes. Once the first-tier partnership leasehold had economic value, the second-tier would be created. According to the Prospectus, the general partner would arrange to finance the second-tier partnership's venture into oil development by selling a carved-out production payment ("COPP") for a price equal to the total capital contribution in the first-tier partnership. The COPP would be payable only out of the oil and gas revenues from the first-tier partnership's leasehold, and would be sold to an outside lender. The sale of the COPP would be analogous to a non-recourse loan. A limited partner participating in the second-tier partner-ships would be entitled to another tax deduction of approximately 90% of his initial investment because the COPP funds would also be allocated to expenses and intangible drilling and development costs of the second-tier leasehold.

Thus, if a limited partner invested $10,000.00 in the first-tier partnership and elected to participate in the second-tier, the investor would receive income tax deductions in the amount of $18,000.00.

The Prospectus included an opinion letter regarding the tax consequences of the transaction. This letter, dated March 13, 1972, was on the letterhead of Defendant Arthur Young and Company and signed by Defendant James L. Houghton.

The Plaintiffs contend that William D. Bradford made material misrepresentations in the Prospectus presented or shown to each investor in order to induce them to purchase limited partnerships, that they relied on the misrepresentations, and sustained damages as a result thereof.

Further Plaintiffs argue that the Arthur Young-James Houghton (hereinafter "AY-JH") opinion letter contained in the Prospectus was materially false and misleading in that (1) it failed to disclose the substantial risks to the tax deductions promised in the Prospectus, (2) it failed to disclose the substantial risks associated with obtaining a COPP loan from an outside lending source, and (3) it failed to disclose the variance between the opinion letter's assumed facts and those facts set forth in the Prospectus. It is claimed that the association of AY, with its reputation as a Big Eight accounting firm, and James Houghton, with his reputation as an expert in oil and gas law, with the Bradford Partnerships and the presence of the AY-JH opinion letter in the Prospectus served as legitimizers of the Program. Plaintiffs allegedly placed reliance on the opinion of AY and Houghton when considering a tax shelter investment in the Bradford Programs.

Plaintiffs allege that Fidelity Bank, N.A. (hereinafter "FBNA") aided and abetted Bradford's scheme in two ways. First, Ronald Hill, who in early 1972 was Vice President and the principal oil and gas lending officer at FBNA and who was in charge of the Bradford and Pioneer accounts, authorized the use of his name in the A-B Partnership Prospectus as a reference. In August, 1972, Hill resigned from FBNA and the name of Fidelity's President, Grady D. Harris, was substituted as a reference in the C-D and E-F Partnership Prospectuses. Second, Plaintiffs contend that Harris,³ as President of FBNA, executed a document dated September 25, 1972, that evidenced a payment of $800,000.00 to the A Partnership secured only by a COPP when in reality no monies had been advanced. Other transactions alleged to be shams occurred in October and December. On Friday, October 27, 1972, FBNA made an $800,000.00 loan to the A Partnership which was repayable on Monday, October 30, 1972. By COPP documents dated December 10, 1972, and executed by Harris, FBNA purported to advance $800,000.00 to the C-D Partnership and $800,000.00 to the E-F Partnership.

It is asserted that FBNA's role in carrying out a sham loan to the A-B Partnership was essential to the success of Bradford's scheme. It assured the successful selling of the C-D and E-F Partnerships because the loan to the A-B Partnership gave credibility to the other Bradford Programs. It is alleged that the sale of the loan was the primary reason investors purchased interests in the later partnerships.

In 1975, the Internal Revenue Service commenced a review of the Bradford Partnerships. As yet the resultant Tax Court litigation is unresolved.

The procedural posture of this action is as follows: In light of the fact that there are some seventy individual Plaintiffs who reside outside the Western District of Oklahoma and in view of the many issues requiring individual inquiry, the parties suggested the possibility of selecting several Plaintiffs who are representatives of the various groups of plaintiffs and presenting a trial of their case in its entirety. Plaintiffs Jerome I. Feldman, Barry M. Brookstein, Albert E. Abraham and Albert A. Rettig were selected by all parties as representative of the various groups of investors.

I.

On the date of trial, April 24, 1983, counsel for the Estate of Grady D. Harris, Jr., presented a copy of a Final Discharge entered in the District Court of Oklahoma County in the matter of the Estate of Grady D. Harris, Jr., deceased, No. P-74-1736, dated July 15, 1981. Counsel then made an oral Motion to Dismiss the Estate as a party to this action.

Before the Final Discharge was entered, the co-executors gave the statutorily required notice but did not give personal notices to any of the Plaintiffs in this action. The question before the Court is whether the entry of the Final Discharge bars continuation of the present action as to the Estate.

The Oklahoma Supreme Court, in Oberlander v. Eddington, 391 P.2d 889 (Okla. 1964), held that a Decree of Distribution under a will entered after notice and hearing is conclusive as to the rights of all parties interested in the estate in the absence of fraud, mistake, or collusion. A Decree of Distribution is ordered upon the final settlement of the accounts of the executor or administrator under 58 O.S. § 631 (1981). Subsequently, after the estate has been fully administered and the executor has paid all money and delivered all properties to entitled parties, a Discharge of the Representative is entered. 58 O.S. § 691 (1981).

In Burford v. Stuart, 412 P.2d 169 (Okla.1966), the Plaintiff did not perfect an appeal from the Order Approving the Final Account of the Executrix, which decreed distribution of the estate, but appealed only from the subsequent order authorizing the discharge of the executrix. The Oklahoma Supreme Court concluded that since no appeal had been taken from the Order Approving the Final Account of the Executrix, such Order and decree were conclusive as against Plaintiff's rights as a contingent beneficiary of an insurance policy. It was determined that the executrix had fulfilled her duties, and was entitled to be discharged under 58 O.S. § 595 and § 691.

The Tenth Circuit has recognized Oklahoma's general rule of finality in Droppleman v. Horsley, 372 F.2d 249 (10th Cir. 1967), an action based on alleged conspiracy in a probate matter. In disallowing what amounted to a...