Samuels v. Wilder
| Decision Date | 09 March 1988 |
| Docket Number | No. 85 C 5711.,85 C 5711. |
| Citation | 702 F. Supp. 1377 |
| Court | U.S. District Court — Northern District of Illinois |
| Parties | Howard B. SAMUELS, et al., Plaintiffs, v. Jack WILDER, et al., Defendants. |
James A. Nations, Terence P. Boyle, William R. Fishman, O'Connor & Hannan, Denver, Colo., Stephen C. Shamberg, Brad L. Jansen, C. Elizabeth McCarty, Friedman & Koven, Jeffrey D. Hupert, Norman S. Lynn, James W. Corbett, Joel Teibloom, Shelley R.Z. Barnett, Lynn & Levenstein, Ltd., Chicago, Ill., for plaintiffs.
Randall L. Mitchell, Philip Fertik, Paul E. Lehner, Adams, Fox, Adelstein & Rosen, Chicago, Ill., for defendants.
The plaintiffs invested $2,744,000 in oil and gas drilling programs at the solicitation of Wilder, a defendant. Wilder told them of his special tie to Sanguine, Ltd., another defendant, which was a company expert in the oil and gas business. Wilder said to plaintiffs that he and his corporations (defendants Wilder, Inc. and Ansam & Associates, Inc.) would act in plaintiffs' best interests in selecting and making oil and gas investments. Wilder knew plaintiffs had little experience in this sort of business and for his services he collected a fee of $109,760, four percent of plaintiffs' total investment. Plaintiffs tell us Wilder and the other defendants were fiduciaries of the plaintiffs.
Wilder retained complete discretion over the choice of investment prospects and Ansam was to deal with the well operators. Wilder and his corporations would maintain full records of the business and make them available to plaintiffs.
Moreover, Wilder told plaintiffs he would have an interest in each well along with plaintiffs. Wilder and Sanguine agreed to allocate a percentage of each well to Wilder who then allocated a portion of his percentage to Ansam. By agreement a fixed percentage of Ansam's portion went to plaintiffs. Wilder, it was agreed, would have sole authority to decide which percentage of each well he would keep and which he would allocate to Ansam, thereby deciding also what allocation there would be to plaintiffs.
The plaintiffs then say that Wilder did not acquire any interests in wells until after partial drilling occurred and Sanguine told him of the results. This information was concealed from plaintiffs. Wilder insisted that only he have contact with Sanguine in order not to endanger his ties with Sanguine. So, it is said, Wilder had an information advantage before he decided how the percentages of the wells would be allocated. And, it is said, he used this advantage to benefit himself by keeping large percentages of the good wells and giving plaintiffs large percentages of the poor wells.
In short, plaintiffs relied on Wilder, an unfaithful fiduciary, to their detriment in the order of two million dollars or more. Sanguine, which operated nearly all the wells and never furnished an accounting to plaintiffs, knew of Wilder's actions and helped him achieve his goals in exchange for large profits. Further, Sanguine was an issuer of securities under federal law, these securities being the fractional, undivided interests in oil and gas properties.
These actions, the improper allocation of interests in wells, transgressed, the plaintiffs claim, several statutes and legal rules.1 Before the Court are cross-motions for summary judgment directed to the complaint.2
The count seeking a remedy under the Illinois Securities Act, defendants argue, is time barred since the state law provides for recision only where notice of recision is given within six months of the purchaser's acquisition of the information on which his claim is based (here August or September, 1984). Ill.Rev.Stat. ch. 121½, par. 137.13 B (1985); Buehl v. Dayson, 127 Ill.App.3d 958, 82 Ill.Dec. 869, 469 N.E.2d 403 (1984). No notice of recision was ever filed, and the complaint in this case, even if it can be construed as such a notice, was not filed until June, 1985. The count seeking relief under section 12(2) of the Securities Act of 1933 is governed by a three year statute of limitations running from the date of purchase (here, at the latest, April 28, 1982), which is more than three years prior to June, 1985. 15 U.S.C. sec. 77m. It is not surprising that "Plaintiffs concede that these arguments have merit...." The Court accepts them.
The remaining statutory foundation for relief under the 1933 Act is section 17(a) and the dispute is whether it gives rise to a private cause of action. The issue has been adequately debated elsewhere. See In re Washington Public Power Supply System Securities Litigation, 823 F.2d 1349 (9th Cir.1987) (en banc). Our Court of Appeals has not decided the question.
The Fifth and Eighth Circuits, along with the Ninth, have found no private cause of action. Landry v. All American Assurance Co., 688 F.2d 381, 384-91 (5th Cir.1982); Shull v. Dain, Kalman & Quail, Inc., 561 F.2d 152 (8th Cir.1977). I find persuasive the reasoning in In re Washington Public Power and Landry and accordingly hold that no private cause of action exists under section 17(a). See also Preston v. Kruezer, 641 F.Supp. 1163 (N.D.Ill.1986) (Roszkowski, J.); Beck v. Cantor, Fitzgerald & Co., Inc., 621 F.Supp. 1547, 1559-60 (N.D.Ill.1985) (Rovner, J.); Marino v. Global Investor Securities, Inc., Current Fed.Sec.L.Rep. (CCH), par. 93,227 at 96,084-085 (N.D.Ill.1986) 1986 WL 15123 (Leinenweber, J.); Rice v. Windsor Industries, Inc., No. 85 C 4196 (N.D.Ill. Feb. 26, 1986) (Plunkett, J.) (LEXIS, Genfed library, Dist. file) 1986 WL 2728; Wagman v. FSC Securities Corp., 1985-1986 Transfer Binder Fed.Sec.L.Rep. (CCH) par. 92,445 (N.D.Ill.1985) 1985 WL 2139 (Holderman, J.). Thus the remaining basis for the prayer in Count I disappears.
On the essential elements of the remaining counts, save conversion in Count IX, the defendants' position is simple. They argue that the undisputed facts show they did not intend to favor themselves in allocating well interests, did not have the information necessary to do so, and, in fact, the allocation results do not support plaintiffs' claim.
The Court is directed to plaintiff Samuels's deposition, Wilder's affidavit and the affidavit of Arcati, the president of Ansam Associates, Inc. These documents show, in essence, that Wilder's allocation decisions were based upon his tax-planning and cash-flow needs and upon investors' commitments. Ansam's allocations, in turn, were proportional to amounts of investment. Neither Wilder nor Ansam had information sufficient to permit them to predict reasonably the value of the wells when they allocated interests. In fact, Samuels admitted in his deposition that it was not possible to tell whether a well was a good producer until it had been in production for at least "12 months or better." In nearly all cases (71 of 74 wells), allocations were made before any production or sales were had from the well. The results of the allocation show no significant advantage to defendants. The plaintiffs' ratio of productive to nonproductive wells (1.054 to 1) was not significantly bettered by Wilder (1.105 to 1) and was not matched by Ansam (.939 to 1). Finally, Arcati and Wilder aver their lack of intent to favor themselves over plaintiffs.
In reply, plaintiffs argue that summary judgment is usually inappropriate on the question of motive, intent or recklessness. Accepting this proposition is of little use to plaintiffs because they do not dispute any of the rest of defendants' arguments. If we assume that defendants' purposes were bad and find they could not and did not fulfill these purposes, the plaintiffs' case for a remedy under 10(b) of the 1934 Act in Count II is lost. Bad intent, without more, is neither tort nor crime.
This analysis forecloses the common law fraud, intentional misrepresentation, fraudulent concealment and breach of fiduciary duty counts since they are dependent upon the claim that defendants favored themselves in the allocations. The flaw in plaintiffs' case also affects the negligent misrepresentation count as does the absence there of the claim that defendants were "in the business of supplying information for the guidance of others in their business transactions." Dixie-Portland Flour Mills, Inc. v. Nation Enterprises, Inc., 613 F.Supp. 985, 990 (N.D.Ill.1985). The papers before the Court show defendants are in the oil and gas business not the information business as are brokers, or others. The state law tort of negligent misrepresentation is not meant to apply to all who, as part of the ordinary course of business, convey information to others. State law limits the reach of this tort claim. See Black, Jackson & Simmons v. Int'l. Business Machines Corp., 109 Ill.App.3d 132, 440 N.E.2d 282, 64 Ill.Dec. 730 (1st Dist.1982). The plaintiffs' redefinition of the tort breaches all these limits.
For these reasons Counts I and III are dismissed and judgment is given to defendants on Counts II, IV, V, VI, VII and VIII.
Plaintiffs' final claim for conversion involves interpretation of three similar sets of agreements among the parties, and cross motions for summary judgment have been offered.
The agreements by which plaintiffs implemented in 1981 and 1982 their investments in defendants' oil and gas well operations had a clause indemnifying Ansam. Ansam served as nominee for plaintiffs, i.e., purchaser of plaintiffs' interests in wells. The clause reads:
The Owner agrees to indemnify the Nominee, his successors, and assigns, and to hold Nominee harmless from all liability, loss, expenses, damages, costs and attorneys fees that Nominee may at any time incur by reason of any type of inquiry, action or suit which may be brought against him or made of him by any person, firm, corporation, or governmental agency or authority or anyone else by reason of the...
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