McCool v. Strata Oil Co.

Citation972 F.2d 1452
Decision Date26 October 1992
Docket NumberNo. 90-1385,90-1385
PartiesRICO Bus.Disp.Guide 8066, RICO Bus.Disp.Guide 8243 Daniel McCOOL, John Pellettiere, Ted R. Potempa, Kenneth A. Stankievich, Plaintiffs-Appellants, v. STRATA OIL COMPANY, an Illinois corporation, Richard A. Miller and Joseph Jocheim, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Peter S. Lubin, Rudnick & Wolfe, David C. Roston (argued), Jeffrey P. DeJong, David H. Latham, Altheimer & Gray, Chicago, Ill., for plaintiffs-appellants.

Cary S. Fleischer (argued), Jon A. Duncan, Patrice A. Powers, Chuhak & Tecson, Chicago, Ill., for defendants-appellees.

Before BAUER, Chief Judge, and CUDAHY and EASTERBROOK, Circuit Judges.

CUDAHY, Circuit Judge.

The plaintiffs invested in an oil drilling project in 1984. They sued in 1989, claiming that they did not get what they paid for. The district court held that their claims under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1988) (the '34 Act), and under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961 et seq. (1988), were time-barred and dismissed the pendent state law claims for lack of subject matter jurisdiction.

Statutes of limitations tend to be more difficult to apply than to define, but this is no ordinary case. Since the district court issued its decision, we have changed the statute of limitations that applies to 10(b) claims, Short v. Belleville Shoe Mfg. Co., 908 F.2d 1385, 1389 (7th Cir.1990), cert. denied, --- U.S. ----, 111 S.Ct. 2887, 115 L.Ed.2d 1052 (1991), the Supreme Court has agreed with our analysis, Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, --- U.S. ----, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991), and Congress has partially overruled the Supreme Court by adding a new section 27A to the '34 Act. Federal Deposit Insurance Corporation Improvement Act of 1991, Pub.L. No. 102-242, Title IV, § 476, 105 Stat. 2236, 2387 (1991) (FDIC Improvement Act), codified at 15 U.S.C. § 78aa-1. We must decide what to do with this tangled web. Further, we must also decide when a civil RICO claim accrues, a question on which the other circuits, and the district courts in this circuit, are deeply divided.

A. Facts

In the early 1980s, Richard Miller and Joseph Jocheim formed a business now known as Strata Oil Corporation. Strata manages and operates a variety of oil and gas projects in Illinois and Oklahoma. Miller has (or had) a friend, John Pellettiere, who invested in three of Strata's projects in 1982 and 1983.

In 1983, Strata entered into a joint venture (Strata/Quest) to acquire and develop a mineral lease on a piece of land in Oklahoma, the Lowe Property. Miller invited Pellettiere to an investors' meeting in the fall of 1983, where the drilling project was described in glowing terms. Pellettiere then introduced Miller and Jocheim to other potential investors, Daniel McCool, Ted Potempa and Kenneth Stankievich.

The plaintiffs (Pellettiere, McCool, Potempa and Stankievich, or "the investors") allege that Miller and Jocheim deceived them about the nature of the Lowe Property project. This deception is the basis for both the securities fraud and RICO claims. In their first complaint, the investors alleged the following oral misrepresentations:

1) the Lowe Property had not been heavily worked before;

2) the plaintiffs would be tenants in common on the lease;

3) maintenance costs would be about $80 per month;

4) wells would not be considered "successful" unless they produced at least 50 barrels of oil a day;

5) the initial investment would be $17,000-$13,000 for the lease and $4,000 to drill the first well (to be followed by another $4,000 if the well were successful).

Complaint p 14-16, 35. Further, the investors alleged the following omissions of material fact:

1) that it would be expensive to remove water from the Lowe Property; and

2) that the defendants would receive overriding royalties in the project.

Complaint p 36. In an amended complaint, filed after the entry of partial summary judgment for Strata, the investors deleted the allegation about the past workings (misrepresentation # 1) and added two new allegations:

1) Strata represented that all investors would share equally in the expenses and profits of the Lowe Property project; and

2) Strata failed to provide offering sheets as required by SEC regulations.

Amended Complaint pp 36, 38.

In summary, although the drilling project appears to have been moderately successful, the investors received a smaller piece of the pie than they thought they were entitled to. Strata owns the mineral lease on the Lowe Property while the investors own only "working interests" in drilling sites on the lease. Strata receives a disproportionate share of the profits and pays none of the expenses. Finally, the expenses themselves have been higher than promised.

The remainder of the story is not relevant to the alleged fraud but is relevant to the running of the statute of limitations. In February 1984, each plaintiff paid $17,000 and signed a "Receipt and Working Agreement." For reasons that will become clear, the Agreement bears reproduction at some length:

This will acknowledge receipt of the sum of $17,000 from [investor] to [Strata], said sum of money being payment in consideration of 1/32nd working interest, subject to a 11/42 of 7/8 overriding royalty interest in a certain portion of a leasehold estate known as the EDITH THOMAS # 1A property located in ... County of Creek, State of Oklahoma, more particularly described as follows:


1. It is understood that payment of said sum of money by the [investor] is a payment for the drilling expense for a test well to be drilled on said leasehold estate. That it is further understood that said [investor] shall provide and will pay $7,000 of the cost of completing and equipping said test well in the event oil and/or gas is found. It is further understood that the legal effect of this agreement is that the [investor] bears a 1/32 share of the cost of operation and maintenance of said well when it is placed on production....


4. In connection with such operation and development including the completion and equipping of the first well, the [investor] shall be liable for ... his pro rata share of the costs and expenses thereof....


16. This is solely a receipt and agreement for the purchase of a working interest in a certain portion of the leasehold estate hereinbefore described. Nothing in this agreement shall be construed as the delivery of an oil or gas assignment to the [investor].


18. The parties hereto shall in no way be deemed to be partners ..., but are now, and shall continue to be tenants in common in the property, whose interest therein shall be liable for only their respective proportionate part of the cost. This Agreement shall not constitute a partnership as defined by the Internal Revenue Code....

Investors' Appendix at 11-12.

In October 1984, the same plaintiffs signed identical Agreements for another investment on the Lowe Property, the Edith Thomas # 2A. This time they paid only $12,000. In May 1984, they invested $12,900 in the Edith Thomas # 3A, and in August 1985, $12,900 in the Fields # 1A.

Periodically, Strata sent newsletters to the investors, reporting successes and problems on "our lease" and "our property." Once the wells began to produce, Strata sold the oil to the Sun Oil Company. Sun provided Strata with division orders, which recorded the allocation of payments to each of the investors. Strata sent copies of the division orders to the plaintiffs, but edited the orders so that each investor received only the notations that related to his share of the proceeds. Each of the plaintiffs received division orders with the notation "WI" beside his name.

In October 1985, Strata accidentally sent out unredacted division orders. At this point McCool noticed that the notation beside his name, "WI," was different from the notation beside the names of the Strata defendants, "ORI." Concerned, he called Pellettiere, who assured McCool that his friend Miller was honest and would never cheat them. Sometime in 1987, however, Pellettiere became concerned when Miller told him that the project was incurring large expenses to build a system that would dispose of salt water from the wells: Pellettiere had thought that a water disposal system was already in place.

The investors sued Strata in Illinois state court in December 1987, contending that Strata was charging them more than actual cost to dispose of waste water. 1 Not until September 1988, however, did the investors hire an attorney to do a title search in Oklahoma. When they discovered that they were not tenants in common on the Lowe Property mineral lease, the investors threatened Strata with another suit and entered into an agreement with Strata to toll any applicable statutes of limitations until March 31, 1989. Unable to resolve their differences with Strata, the investors finally filed suit in April 24, 1989.

B. District Court Proceedings

The investors brought a six-count complaint against Strata, Miller and Jocheim. The first two counts alleged violations of the securities laws and of RICO. Counts three through six set out a variety of state law claims not now relevant. After some procedural skirmishing, the district court entered partial summary judgment for the defendants.

The court concluded that a three-year Illinois statute of limitations applied to the securities fraud claim, McCool v. Strata Oil Co., 724 F.Supp. 1232, 1234 (N.D.Ill.1989), and that a four-year limitations period applied to the RICO claim. Id. at 1237 (citing Agency Holding Corp. v. Malley-Duff & Assoc., Inc., 483 U.S. 143, 156, ...

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