Norden v. Friedman

• Decision Date: 26 July 1988
• Docket Number: No. 70050,70050
• Citation: 756 S.W.2d 158
• Parties: Blue Sky L. Rep. P 72,919 Richard P. NORDEN, Plaintiff-Appellant, v. William H. FRIEDMAN, Bob W. Bell, et al., Defendants-Respondents.
• Court: Missouri Supreme Court

Page 158

756 S.W.2d 158

Blue Sky L. Rep. P 72,919

Richard P. NORDEN, Plaintiff-Appellant, v. William H. FRIEDMAN, Bob W. Bell, et al., Defendants-Respondents.

No. 70050.

Supreme Court of Missouri En Banc.

July 26, 1988.

Rehearing Denied Sept. 13, 1988.

Joseph R. Soraghan, St. Louis, for plaintiff-appellant.

Paul H. Schramm, Clayton, for defendants-respondents.

HIGGINS, Judge.

Richard Norden seeks rescission of a contract to purchase a three-quarter working interest in an oil lease. Following trial to the court, judgment was entered against Norden on Counts I and II of the petition, based on section 409.411(a)(1), RSMo 1986, for failure to register securities, and section 409.411(a)(2), for securities fraud for, inter alia, failure to file the action within the 2-year limitations period, section 409.411(e), RSMo 1986. Judgment was entered against Norden on Count III, based on common law fraud for, inter alia, failure to make a case. Because the judgment against Norden on all three counts was properly entered by the trial court, the judgment is affirmed.

Defendants, Dr. William Friedman and his two sisters, purchased a three-quarter working interest in an oil lease in Southern Illinois known as the Piper Lease. The Friedman defendants were made aware of the availability of the Piper Lease through defendant Bob Bell, an acquaintance with experience in oil exploration and drilling operations.

The other one-quarter working interest, held by Bob Bell's son as nominee for Bob Bell, was a "carried interest," meaning it was free and clear of all drilling and completion costs with respect to the first well drilled on the Piper Lease, known as Piper 1. Post-completion costs would be divided proportionately between the Friedman defendants and Bob Bell. The Bell interest was given in consideration of Bell's efforts in obtaining the lease, research into potential productivity on the lease and his agreement to arrange and supervise the drilling and completion of Piper 1. Although technical matters were delegated to Bob Bell, the Friedman defendants retained all ultimate authority. Bell was paid a monthly fee separate from the carried interest for daily maintenance and operation of Piper 1.

Piper 1 produced between five and six barrels of oil per day, but the oil was accompanied by a large amount of saltwater. The expense of disposing of the water made Piper 1 commercially unfeasible. Bell proposed drilling a water injection well to accomplish disposal of the unwanted water by recycling it underground. Instead of drilling the injection well, the Friedman defendants decided to cease operations. Bob Bell then had the pumping and storage equipment removed from the Piper site and drilling and production ceased.

Plaintiff Norden, a patient of Dr. Friedman, expressed a desire to enter into the oil business in southern Illinois. Norden stated that his prior experience in the construction business would be an asset because he would get involved in hands-on management; Friedman explained he believed a joint venture between himself and Norden was impractical. Norden then asked if Friedman was interested in selling any of his oil interests. Friedman responded that the three-quarter working interest in the Piper Lease was available. Friedman described the lease and his own understanding of Bell's one-quarter carried interest. He also explained the reason why the lease was not then producing.

After Friedman offered to sell the lease for $60,000, Norden flew to Illinois to view the lease site and meet with Bob Bell. At that meeting Bell explained his understanding of the one-quarter carried interest and his duties as operator of the lease. He agreed to stay on as operator if Norden purchased the Friedman's interest. Bell told Norden that he believed the lease would become more productive if the water injection well were drilled.

While touring the lease cite, Norden noted the absence of pumping and storage equipment; the only external well was a single pipe sticking out of the hole where Piper 1 had been drilled. Norden explained to Bell he intended to enter actively into the oil business in southern Illinois, controlling the operation and development of any oil leases he might acquire.

Norden agreed to purchase the Friedman defendants' three-quarter working interest in the Piper Lease in a telephone conversation with Dr. Friedman February 27 or 28, 1981; payment was deferred to permit Norden to finance the purchase through a lending institution. Norden obtained his loan March 24, and forwarded his check for the purchase price to the Friedman defendants. The Friedman defendants' assignments to Norden of their three-quarter interest in the lease were executed between May 15 and May 18, 1981. These assignments were not registered as securities with the state of Missouri; nor had the Friedman defendants or Bob Bell registered as broker dealers or agents with the state, and thus they were not exempt from registration requirements under section 409.402(b)(3), RSMo 1986.

The Piper Lease began to produce in June 1981 when, at Norden's direction, four new wells were drilled. Norden decided when and where to drill the wells, which well to convert into the injection well, and he negotiated with the suppliers.

When the wells failed to produce as expected, a dispute arose between Bell and Norden over amounts owed Bell, and the relationship deteriorated. Bell eventually severed the relationship by selling his one-quarter interest to a third party as part of a package with some of his other lease interests. This litigation ensued, and the trial court entered judgment in favor of Bell and the Friedman defendants.

Appellant Norden contends:

1. the trial court judgment should be reversed and judgment entered for Norden because there is no substantial evidence to support the judgment of dismissal;

2. the lease assignments executed by the Friedman defendants in favor of Norden are "per se" securities according to the plain meaning of the Missouri Uniform Securities Act;

3. even if the assignments are not securities per se, they can be included within the definition of a security as an investment contract because Norden did not have control of the lease interest. Norden claims control, or lack of dependence on the efforts of others, must be in existence at the time of the purchase and such control must be of the type that is significant in nature;

4. the defendants are liable as sellers of unregistered securities;

5. development costs should be included in the measure of damages; and

6. the action was not barred by the 2-year statute of limitations of section 409.411(e), RSMo 1986.

The Missouri Court of Appeals, Eastern District, affirmed the judgment of dismissal on a determination that there had been no violation of the Missouri Securities Act. Plaintiff-appellant, seeking further construction of the Missouri Securities Act, applied for and was granted transfer. It is unnecessary to construe the Missouri Securities Act further because the judgment against Norden would have to be affirmed for the reasons previously indicated.

Specifically Counts I and II of plaintiff's cause of action are barred by the 2-year statute of limitations in section 409.411(e) because this action was commenced on March 23, 1983, more than 2 years after February 27 or 28, 1981, the date of the oral contract whereby plaintiffs agreed to purchase and the Friedman defendants agreed to sell their interest in the Piper Lease. Appellant argues that the trial court erred in finding a binding agreement existed on February 27 or 28, 1981, because the agreement was contingent upon Norden's obtaining financing for the purchase of the Friedman defendants' three-quarter working interest.

Friedman testified he believed he was bound to sell the lease interest for $60,000 following the telephone conversation with Norden on February 27 or 28. Norden testified: "I would say in that telephone conversation we reached an agreement that I would purchase three-quarters of the Piper lease upon his recommendation to leave Mr. Bell in as the operator and as far as making an agreement to make payment I had to borrow the money from the Mark Twain Bank in Harvester, Missouri, and I would notify him at a later date when it would be forwarded." The trial court's finding that a contract existed following the conversation of February 27 or 28, 1981, is thus supported by substantial evidence and must be affirmed. Rule 73.01; Murphy v. Carron, 536 S.W.2d 30, 32 (Mo. banc 1976).

Norden claims that the statute of limitations would not begin running on February 27 or 28 because the oral agreement would be in violation of the statute of frauds. Section 432.010, RSMo, the statute of frauds, provides:

No action shall be brought ... upon any contract made for the sale of lands ... or an interest in or concerning them, or any lease thereof, for a longer time than one year, or upon any agreement that is not to be performed within one year from the making thereof, unless the agreement upon which the action shall be brought, or some memorandum or note thereof, shall be in writing and signed by the party to be charged therewith....

A necessary preliminary determination is whether the statute of frauds is applicable to a lease of an oil interest. The record is unclear but if the contract was not to be performed within one year it would be within the statute. § 432.010, RSMo 1986; Aylor v. McInturf, 184 Mo.App. 691, 171 S.W. 606 (1914). If the oil and gas lease were considered an interest in lands then the statute of frauds would apply. § 432.010, RSMo 1986. Some jurisdictions, however, regard an oil and gas lease as a mere chattel interest and not within the statute of frauds. See, e.g., Walla Walla Oil, Gas & Pipe Line Co. v. Vallentine, 103 Wash. 359, 174 P. 980 (1918). Research indicates no Missouri case in point, but the majority rule holds oil and gas leases are an interest in lands and...