Mayer v. Oil Field Systems Corp.
| Decision Date | 10 October 1986 |
| Docket Number | D,No. 843,843 |
| Parties | Fed. Sec. L. Rep. P 92,953 Elfriede MAYER, Plaintiff-Appellant, v. OIL FIELD SYSTEMS CORP., Integrated Energy, Inc., and John Doe fictitious, the true name or names being presently unknown to the plaintiff, Defendants- Appellees. ocket 85-7949. |
| Court | U.S. Court of Appeals — Second Circuit |
Jules Brody, New York City (Stull, Stull & Brody, New York City, on brief), for plaintiff-appellant.
Franklin B. Velie, New York City (Janis G. White, Christy & Viener, New York City, on brief), for defendant-appellee Oil Field Systems Corp.
Brian J. Gallagher, New York City (Kronish, Lieb, Weiner & Hellman, New York City, on brief), for defendant-appellee Integrated Energy, Inc.
Before OAKES, KEARSE and PRATT, Circuit Judges.
In this opinion, undoubtedly to be dubbed "Mayer V", we consider the appeal of plaintiff Elfriede Mayer from a final judgment of the United States District Court for the Southern District of New York, Robert W. Sweet, Judge, dismissing her complaint seeking damages from defendants Oil Field Systems Corp. ("OFS") and Integrated Energy, Inc. ("Integrated"), on account of their allegedly false and misleading statements and nondisclosures in a prospectus and other communications, in violation of Secs. 11 and 12(2) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. Secs. 77k and l(2) (1982); Sec. 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. Sec. 78j(b) (1982), and Rule 10b-5 promulgated thereunder by the Securities Exchange Commission (Sec. 10(b) and Rule 10b-5 hereinafter collectively referred to as "Sec. 10(b)"); and in violation of OFS's fiduciary duties under state law. In a prior appeal in this case, we reversed the district court's dismissal of Mayer's complaint for failure to state claims upon which relief can be granted under the federal securities laws, see Mayer v. Oil Field Systems Corp., [1982-1983] Fed. Sec. L. Rep. (CCH) p 99,048 (S.D.N.Y.1982) ("Mayer I" ), as we concluded that Mayer had standing and had stated a claim under Sec. 10(b). Mayer v. Oil Field Systems Corp., 721 F.2d 59 (2d Cir.1983) ("Mayer II" ). On remand, following discovery and crossmotions for summary judgment, the district court dismissed the complaint principally on the ground that the undisputed facts showed that Mayer was not deceived and had actual knowledge of each fact she alleged had been misrepresented or withheld. Mayer v. Oil Field Systems Corp., 611 F.Supp. 635 (S.D.N.Y.1985) ("Mayer III" ); see also Mayer v. Oil Field Systems Corp., 620 F.Supp. 76 (S.D.N.Y.1985) ("Mayer IV" ) (denying reconsideration).
On appeal now from the final judgment entered following Mayer III and Mayer IV, Mayer contends that the district court erred in failing to grant judgment in her favor on the federal securities law claims and in refusing to take pendent jurisdiction of her state law claims. Finding no merit in her contentions, we affirm the judgment of the district court.
The events underlying this case have been amply set forth in Mayer III, 611 F.Supp. 635, familiarity with which is assumed. None of the following facts is in dispute.
Mayer was a limited partner in two oil partnerships in which OFS was the general partner. The pertinent agreements provided that OFS was, subject to limitations not pertinent here, to have full and exclusive discretion in the management and control of the partnerships and that the limited partners would have no role in the management of the partnerships' affairs. Each partnership agreement established a time of "payout" or "first payout," defined in the agreements as "[t]he time at which Partnership Net Revenues distributed or distributable to the Limited Partners equals the aggregate amount contributed by the Limited Partners to the capital of the Partnership under their Subscription Agreements."
In March 1981, Integrated, an independent company formed in 1979 to acquire oil and gas properties, distributed a prospectus (the "Prospectus") in which it offered to exchange shares of its common stock for interests in oil and gas properties (the "Exchange Offer"). Bache Halsey Stuart Shields ("Bache") was to serve as dealer manager for the Exchange Offer. The first page of the Prospectus stated the procedure by which Integrated proposed to determine the number of shares to be exchanged for each interest tendered:
The number of shares of Common Stock issuable for tendered Interests will be determined by dividing the exchange values (the "Exchange Values") of such interests by $10, an arbitrary figure The Prospectus detailed the risk factors present in the Exchange Offer, including the following:
which has been established for the purpose of making the Exchange Offer. The Exchange Values of Interests tendered will be based upon available engineering estimates and other information.
Although no market currently exists for the shares of [Integrated's] Common Stock, management of [Integrated] believes that a market will develop. However, no assurance can be given that a market will develop or as to the prices at which the Common Stock will trade. The market value of the Common Stock may be significantly less than the Exchange Values of the Interests tendered to and accepted by [Integrated]....
... Because of the diversity of Interests which may be tendered and the subjective nature of oil and gas reserve estimates, and because the determination of Exchange Values depends upon subjective judgments of [Integrated], there can be no assurance that the Exchange Values of all interests tendered to and accepted by [Integrated] will be consistent or that actual values of Interests acquired by [Integrated] will equal their Exchange Values. To the degree that such Exchange Values are not consistent, certain accepting Holders may benefit more from the Exchange Offer than others. See "Limitations on Determination of Exchange Values," below.
This section of the Prospectus also stated that "the ultimate value of any Interest tendered may be substantially more or less than the Exchange Value assigned to such Interest."
By letter dated May 7, 1981 (the "May 7 Letter"), OFS sent to Mayer and the other limited partners a copy of Integrated's Prospectus, together with copies of articles from The New York Times, Fortune magazine, and Legal Times of Washington about the Integrated Exchange Offer. The May 7 Letter stated in part as follows:
We have not determined whether to accept the Integrated proposal or not, but feel we should proceed with the [independent appraiser's] evaluation of your wells. Once the reservoir report is completed, we will make a decision based on the results....
....
In the event we accept the exchange, it is our intention to distribute the shares to the partners. It goes almost without saying that we are moving from a reservoir and production risk to a price risk on the stock, for the period you hold the stock.
The market risk should be somewhat ameliorated by the fact that Bache is simultaneously underwriting Integrated's shares at $10 per share and would have strong incentive to protect the market. The conventional wisdom as set forth in the Fortune article is that the stocks initially go down while people who exchange liquidate their interest, and then zestily rebound.
(Emphasis in original.) The accompanying article from Fortune described a number of stocks whose prices had risen after such an exchange, and it referred prominently to the likelihood of the initial market price of the stock being low when "many former limited partners take advantage of the opportunity to cash in." However, it did not state that stock prices thereafter usually rise but said only that "if shares are priced too low, 'the market will recognize this and the stock will go up.' "
In August 1981, OFS agreed, following negotiations with Integrated and the receipt of an independent appraisal of the partnership properties, to have its partnerships participate in the Exchange Offer. Integrated issued a Prospectus Supplement dated September 11, 1981, listing the exchange values of the partnership interests tendered, including those of OFS. The Prospectus Supplement stated that "[t]he number of shares of Common Stock issuable for the Interests has been determined by dividing the Exchange Values of such Interests by $10.00, an arbitrary figure [t]he prices at which the Common Stock may trade following the consummation of the Exchange Offer may be significantly less than the $10 used to determine the number of shares issuable for Interests, and may bear no relationship to the Exchange Values or the fair market values of the tendered Interests.
which has been established for the Purpose of making the Exchange Offer," and that
The Prospectus Supplement also stated that Bache was acting as dealer manager for the Exchange Offer. The Prospectus required that partnerships that agreed to the exchange reconfirm their tenders prior to October 15, 1981; failure to reconfirm would constitute a withdrawal of the tender. OFS sent its reconfirmation letter on September 22. The Prospectus stated that Integrated intended to exchange its shares for the partnership interests as soon as practicable after October 15, but that partnerships could withdraw their reconfirmations at any time up to the actual exchange date.
OFS sent the limited partners a copy of Integrated's Prospectus Supplement on or about September 15. The covering letter stated that the partners as a group would be entitled to 99% of the Integrated shares until the program reached payout. By letter dated October 6, OFS informed the limited partners that the Exchange Offer had a projected closing date of October 15, 1981, and that the Integrated shares would thereafter be sent directly to each limited partner. The letter...
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