Garfield v. Strain
| Decision Date | 07 August 1963 |
| Docket Number | No. 7175.,7175. |
| Citation | 320 F.2d 116 |
| Parties | George GARFIELD, Appellant, v. T. C. STRAIN and R. E. Maresh, Appellees. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Robert C. Wilson, Lakewood, Colo., for appellant.
Milton J. Blake and Thomas Smart, Denver, Colo., for appellees.
Before MURRAH, Chief Judge, and BREITENSTEIN and HILL, Circuit Judges.
This is an appeal from a judgment for Maresh and Strain, in their action to recover damages for Garfield's breach of a contract to purchase an undivided one-half interest in certain oil and gas leases with a test well drilled thereon. The action was filed in the Colorado State Court and removed to the Federal Court on requisite diversity.
The suit arises in this manner. Maresh, an experienced geologist, was the assignee of certain oil and gas leases covering land in Nebraska. To raise money for the drilling of a test well by Strain, he undertook to sell fractional interests in the leases. Strain knew Garfield, who was then living in New Jersey, and with whom he had apparently done business. Strain told Maresh that Garfield might possibly be interested in investing in the venture and, with Maresh's consent, called Garfield and offered him a one-half working interest in the Maresh leases. Garfield indicated an interest, and several days later Strain and Maresh by telephone conversation with Garfield concluded the sale. The next day a written contract signed by Maresh and Strain was mailed to Garfield in New Jersey. The contract provided that Garfield was to purchase a one-half interest in the leases for $10,500.00, and that for the same consideration, the sellers agreed to drill a test well on a portion of the leases. The contract further provided for formal delivery of the assignment and payment of the purchase price within 30 days "at the request of either party." Accompanying the contract was a geological report (prepared by Maresh) together with maps and other data pertaining to the leases. Also accompanying the contract was a letter from Strain to Garfield stating that the $10,500.00 purchase price included the total cost of the land and lease acquisition, geological services, staking and making location, as well as the complete drilling of the test well. Strain promised to keep Garfield informed of the progress of the well and to bill him direct when it was completed. Several days later, the appellant signed the contract and returned it to the appellees.
After receiving the contract, Strain immediately moved onto location, drilled and completed the proposed test well as a dry hole, and made demand upon Garfield for payment of the purchase price. Garfield refused to pay the agreed price and this suit on the contract followed. The complaint recited the contract, alleged performance of all conditions precedent, and made formal tender of the assignments conveying a one-half working interest in the leases to Garfield, and prayed for judgment in the amount of the contract price. The answer admitted the execution of the contract and the drilling of the test well, but affirmatively alleged that the transaction involved the offer and sale of an unregistered "security" in violation of the pertinent provisions of the Securities Act of 19331; that Garfield, as the purchaser, was therefore entitled to rescind the contract; and that in any event, Strain and Maresh had breached the contract by failing to deliver the assignments to Garfield within the 30 days provided therein.
Upon the trial of the case to the court, the sellers asserted, and the trial court held, that the transaction was exempt from the registration provisions of the Act, because it did not involve any "public offering"2. The court further held that the sellers fully performed their obligations under the contract by drilling the test well and by formally tendering in court the assignments of the one-half working interest to the purchaser, and entered judgment on the contract.
It seems to be assumed that if the sale was in violation of the Securities Act, i. e., if it involved a "public offering of unregistered securities", the purchaser is entitled to rescind the contract and no action would lie upon it. Cf. A. C. Frost & Co. v. Coeur D'Alene Mines Corp., 312 U.S. 38, 61 S.Ct. 414. For purposes of this appeal, we will indulge in the same assumption. It is conceded on appeal that the transaction involved the sale of an "unregistered security" within the meaning of the Act, and that the mails and other instruments of interstate commerce were used in the offer and sale. The narrow question then is whether the sale involved any public offering.
Neither the statute nor the decisions attempt to prescribe any rule of thumb for determining whether a given transaction involves a "public offering" as that phrase is used in the statute. The number, amount and manner of the offering are, however, distinctly relevant, and the general criterion is whether the particular persons affected stand in need of the protection of the Act. The Act was not intended as protection for those "shown to be able to fend for themselves." S. E. C. v. Ralston Purina Co., 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494; Woodward v. Wright, 10 Cir., 266 F.2d 108. The burden is upon the one claiming exemption from registration, to show the lack of a public need therefor, Woodward v. Wright, supra.
The trial court specifically held that the sellers had sustained the burden of showing that the sale was exempt and the Act inapplicable on the following grounds: (a) "The smallness of the transaction and the insubstantial number of offerees"; (b) "The fewness of the units offered and sold;" (c) "* * * under the surrounding facts and circumstances, no public interest stood in need of protection afforded by registration and none of the offerees and purchasers stood in such need; (d) "The close...
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