San Francisco-Oklahoma Petroleum Exploration Corp. v. Carstan Oil Co., Inc., FRANCISCO-OKLAHOMA

• Decision Date: 21 June 1985
• Docket Number: FRANCISCO-OKLAHOMA,Nos. 83-1230,84-1228,s. 83-1230
• Parties: Fed. Sec. L. Rep. P 92,094 SANPETROLEUM EXPLORATION CORPORATION, Plaintiff-Appellee, v. CARSTAN OIL COMPANY, INC. and Courtney G. Rogers, Defendants-Appellants. William R. Rogers, Defendant. SANPETROLEUM EXPLORATION CORPORATION, Plaintiff-Appellant, v. CARSTAN OIL COMPANY, INC., Courtney G. Rogers, and William R. Rogers, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 962

765 F.2d 962

Fed. Sec. L. Rep. P 92,094

SAN FRANCISCO-OKLAHOMA PETROLEUM EXPLORATION CORPORATION, Plaintiff-Appellee, v. CARSTAN OIL COMPANY, INC. and Courtney G. Rogers,

Defendants-Appellants.

William R. Rogers, Defendant.

SAN FRANCISCO-OKLAHOMA PETROLEUM EXPLORATION CORPORATION, Plaintiff-Appellant, v. CARSTAN OIL COMPANY, INC., Courtney G. Rogers, and William

R. Rogers, Defendants-Appellees.

Nos. 83-1230, 84-1228.

United States Court of Appeals, Tenth Circuit.

June 21, 1985.

Robert M. Beachy of Van Osdol, Magruder, Erickson and Redmond, Kansas City, Mo., for defendants/appellants/appellees.

James C. Lang of Sneed, Lang, Adams, Hamilton, Downie & Barnett, Tulsa, Okl. (Melinda J. Martin, Tulsa, Okl., with him on the brief), for plaintiff/appellee/appellant.

Before BARRETT and SETH, Circuit Judges, and BURCIAGA, District Judge ^*.

PER CURIAM.

This was an action seeking rescission of a purchase of an undivided working interest in a producing oil well and for reimbursement. The defendants were Courtney Rogers, William Rogers, and Carstan Oil Company. The complaint alleged violations of state and federal securities laws. The basic questions on appeal are whether the interest was a "security" under the Securities Act of 1933 and whether the only remaining defendant, William Rogers, was a "controlling" person under Section 77o of the Act with the requisite knowledge to be held liable as would be the corporate defendant.

The trial court entered summary judgments against Courtney Rogers and the corporation. Both these defendants have been discharged in bankruptcy. The trial court as to defendant William Rogers (who was not involved in the bankruptcy) decided that he was a "controlling person" under Section 77 o, but he did not have sufficient knowledge of the facts to be liable. William Rogers is the only defendant involved in the appeals.

According to the record the corporate defendant was organized for the purpose of selling undivided interests in oil properties. William Rogers provided the money to organize the company, he was a director and the sole stockholder. His son, Courtney Rogers, was the active party in the company, but the record shows that he was having trouble with creditors and hence had his father appear as the owner and a director. The son's name was not used although he was running the company.

The company put advertisements in newspapers in several states offering for sale undivided working interests in a producing well in Kansas to be operated by the corporation. The interests were not registered under the Securities Act of 1933 or in any other way.

As mentioned, the trial court determined that William Rogers was a "controlling person" under 15 U.S.C. Sec. 77o who could be held liable for violations of the Act as would be the corporation if he had the required knowledge. Section 77o provides in part:

"Every person, who, by or through stock ownership, agency, or otherwise, ... controls any person liable under sections 77k or 771 ..., shall also be liable ... unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist."

17 C.F.R. 230.405 provided as to "control":

"The term 'control' ... means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise."

As mentioned, William Rogers assisted in organizing the corporation. He was a director and was the sole stockholder at the time the advertisements appeared. This was shown by a tax report submitted for the corporation. He signed the corporate minutes and reports and appeared to be, and occupied the position, of one in charge. The proof showed that he was a "controlling person" as defined in the Regulations and as the term was used in the Act. We thus agree with the trial court on this point.

Liability would attach to the corporation in these circumstances if there had been no registration of the "securities", if the transactions were accomplished by the use of the mails or an instrumentality of interstate commerce. These facts were established in the trial court proceedings as to the corporation. Since Mr. Rogers was a "controlling person" under Section 77o he would be also liable "unless [he] had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist." The trial court determined that William Rogers did not have such knowledge or reasonable ground and so found him not liable under the Act. The position taken by the trial court, in our view, is contrary to the record. As mentioned, appellee Rogers knew the purpose for which the corporation was organized and he participated therein. He knew of sales of the interests by mail and bought one himself. He received no prospectus. He also apparently received other interests for his assistance in organizing the corporation. He had acquaintances who had bought shares as he did. He was experienced in making investments in corporations and had received prospectuses in other investments. His actual knowledge of the transactions and how they were handled was significant. The Act says "no knowledge of ... the existence of the facts" is necessary to escape liability.

To this actual knowledge we may add the elements which could constitute the reasonable ground to believe "the facts." Thus he was a director and the sole stockholder. As a director he certainly had the duty to know the basic or sole function for the corporation--the sale of undivided interests--and how this was being carried out--by mail--and whether this was in accordance with the basic statutory requirements. He signed the minutes of the corporate meetings and thus must have known from that source the lack of registration.

It appears that when the corporate violation was established, and when this defendant was shown to be a controlling person, plaintiff had established a prima facie case, Swenson v. Engelstad, 626 F.2d 421 (5th Cir.). The defendant had the burden to demonstrate the exception to Section 77 o --a lack of knowledge. (There is no private offering issue.) This he attempted to do by taking the position that he was a figurehead; that his name was used because his son could not use his, he did not participate in any way; and that he had made no effort to learn what the corporation was doing. When reliance is placed on his testimony it demonstrates that he must have made a conscious effort not to know. This established that he had not performed his duties as a director. He had the opportunity to know as there is no hint whatever that this is a case where a director or officer made an effort to find out and was unable to find the facts or was prevented from doing so.

We do not need to decide whether his position as a director and as the sole stockholder was enough to demonstrate control. It seems apparent that he had the authority and the power to control although he may not have sought to exercise the power. See G.A. Thompson & Co., Inc. v. Partridge, 636 F.2d 945 (5th Cir.); Carpenter v. Harris, Upham & Co., Inc., 594 F.2d 388 (4th Cir.); Lanza v. Drexel & Co., 479 F.2d 1277 (2d Cir.).

We must conclude that this defendant did not demonstrate that he came within the knowledge exception of Section 77 o. This exception refers not to a particular transaction, but to the existence of the basic facts relating to the...