Shepperd v. Boettcher & Co., Inc.

• Decision Date: 17 May 1988
• Docket Number: No. 87-132,87-132
• Citation: 756 P.2d 182
• Parties: Blue Sky L. Rep. P 72,747 Rex A. SHEPPERD and Steve Edwards, Plaintiffs-Appellants, v. BOETTCHER & COMPANY, INC., Defendant-Appellee.
• Court: Wyoming Supreme Court

Page 182

756 P.2d 182

Blue Sky L. Rep. P 72,747

Rex A. SHEPPERD and Steve Edwards, Plaintiffs-Appellants, v. BOETTCHER & COMPANY, INC., Defendant-Appellee.

No. 87-132.

Supreme Court of Wyoming.

May 17, 1988.

Richard Miller, Casper, Edward J. Pluimer and Peter M. Lancaster of Dorsey & Whitney, Minneapolis, Minn., for plaintiffs-appellants.

William E. Murane, Jeffrey T. Johnson, and A. Bruce Jones of Holland & Hart, Denver, Colo., Jack D. Palma, II, of Holland & Hart, Cheyenne, for defendant-appellee.

Joseph B. Meyer, Atty. Gen., Gay Woodhouse, Sr. Asst. Atty. Gen., for amicus curiae Wyoming Secretary of State.

Before THOMAS, CARDINE, URBIGKIT and MACY, JJ., and KAIL, District Judge.

URBIGKIT, Justice.

By certification from the United States Court of Appeals for the Tenth Circuit, this court determines as a question of Wyoming law:

"Does the sale of an undivided one-and-two-thirds per cent working interest in an oil and gas lease constitute a 'security' as defined by the Wyoming Uniform Securities Act, Wyo.Stat.Ann. § 17-4-101 et seq., when the owner of the operating interest retains exclusive control over the drilling operations?"

This certified question is answered "Yes," subject to circumstances of the individual sales transaction which would be factually determinative.

A state law claim was filed under 28 U.S.C. § 1332 by diversity jurisdiction in the United States District Court, District of Wyoming which alleged state security law violations. That court dismissed pursuant to Rule 12(b)(6), F.R.C.P. for failure to state a claim upon which relief can be granted, and appeal to the Tenth Circuit Court of Appeals resulted in the present certification to this court pursuant to Rule 11.01, W.R.A.P.

From the facts stated in the certification as extrapolated by the Tenth Circuit Court of Appeals from the original complaint, we discern, as pleading contentions subjected only to a motion-to-dismiss response, that defendant Boettcher & Company, Inc. (Boettcher), a securities broker-dealer, solicited the sale

" * * * of certain undivided fractional working interests in oil, gas and mineral leases in Louisiana operated by Latham Exploration Company, Inc. ('Lexco'). Pursuant to this solicitation, plaintiffs Rex Shepperd and Steve Edwards each purchased an undivided one-and-two-thirds per cent working interest by entering into two participation agreements on October 22, 1985, which obligated them to pay a proportionate share of the costs to be incurred in drilling operations. According to the participation agreements, Lexco retained complete control over managerial decisions associated with drilling operations. The complaint states: '[Plaintiffs Shepperd and Edwards] did not receive with their working interests/securities the right to exercise practical and actual control over the managerial decisions associated with the drilling operations or any Lexco enterprise; the participation agreements provided Lexco complete control over all drilling operations.' Shepperd and Edwards' investments proved unsuccessful, and they each lost $142,982.23."

With professed violations of filing and registration requirements under the Wyoming Uniform Securities Act, § 17-4-101 et seq., W.S.1977, plaintiffs sought compensatory damages, prejudgment interest, costs, and attorneys' fees. The complaint was dismissed with prejudice when the federal district court (in reliance on a 1962 opinion of the Wyoming Attorney General) agreed with the securities broker-dealer that the Wyoming legislature had intended to exclude all oil and gas interests from the scope of its definition of a security. See Shepperd v. Boettcher & Company, Inc., 613 F.Supp. 287 (D.Wyo.1985). ¹ The Tenth Circuit Court of Appeals, in concluding that the proceeding involved an important question of policy under Wyoming law, certified the legal question to this court in order to afford an opportunity for state court analysis of this important aspect of Wyoming statutory security-regulation law.

The issue is emplaced by Wyoming legislative adoption of the definition of security for the purpose of the enactment of its version of the Uniform Securities Act by Ch. 160, S.L. of Wyoming 1965, § 17-4-101, W.S.1977. See general background discussion in Comment, The Wyoming Uniform Securities Act--A Review, I Land & Water L.Rev. 271 (1966). The Wyoming law developed a difference in phraseology by amendments of the initially used model act before its final passage. S.F. No. 10, Senate Digest 1965 at 56.

Consequently, a legislative-intent inquiry developed in the decision of the district court that deletion of a "certificate of interest or participation in an oil, gas or mining title or lease or in payments out of production under such a title or lease as one type of defined security," dispositively excluded the contested sales transaction from encompassing a covered security for regulatory purposes under the act. The enactment result had been to delete the express inclusion as found in the Uniform Securities Act, § 401(1), and in the federal law, 15 U.S.C. 77b(1), without the substitution of an express exclusion as enacted in at least one state (Oklahoma). See State ex rel. Day v. Petco Oil & Gas, Okla., 558 P.2d 1163 (1977) and 71 Okla.Stat. § 2(1) Laws 1961, p. 58.

The practical proposition now presented is whether these customer-purchasers of the oil play investment interest stated a security act nonregistration claim in their complaints against the broker-dealer. It was generally recognized by counsel in oral argument that coverage would probably exist in sister jurisdictions under laws and adopted precedent, but that the identical status of security law phraseology is novel to Wyoming. ²

The secretary of state, as the entity responsible for act enforcement, filed an amicus curiae brief in strong opposition to the federal district court decision since that court not only found an exclusion by deletion, but also found that the rules and regulations of the secretary of state which defined covered investment contracts as including oil and gas working interests are "contrary to the legislative intent behind the Wyoming Uniform Securities Act." Shepperd v. Boettcher & Company, Inc., supra, 613 F.Supp. at 290.

To address the specific issue certified, we have to define the subject of the sale as alleged in the complaint. The nature of the cost contributory working interest with severed right of management is clearly definable as a separate category of oil interest participation adventure for the speculator or investor. It is not a horse for widows, orphans, or trust managers to ride. Risk and cost are related to the status of indeterminate obligation, and benefit or profit is subject to drilling successes and suitability of profit attribution and divisional fairness as effectuated by promotional characteristics. The significant number of securities act cases involving this kind of asset is demonstrative of the risks. ³

In dealing with the specified property classification of the working interest with severed rights of control, definitions are required. By name, working interest is the leasehold right as the interest providing the right to work. Any fractional working interest is consequently severed from that estate. It can be carried or participating, dependent upon proportional responsibility to contribute to costs of drilling and development expenses. Clearly, from the minimum information here, this investment included a participative responsibility in cost. We now add--or extract from the nature of the normal working interest as some fraction of the original leasehold estate--another function, partnership or venture control which either remains with or is assigned to the owner of the operating interest. In result, the purchaser of the participating working interest with severed rights of control has certain contractual rights and obligations by contract, but not by property ownership. ⁴

If intention is to be defined in legislation, the deletion of the explicit inclusion of "a certificate of interest or participation in an oil, gas or mining title or lease or in payments out of production under such a title or lease" and countervailing disinclination to state an express exclusion of the interest from the definition of the security, leads this court to conclude that the interest or participation is by definition neither expressly included nor expressly excluded under the law as a covered security. Consequently, regulatory inclusion is dependent upon the essential purchase transaction within which the determiner of fact is entitled to consider the severed right of control applicable to the nature of the investment as acquired. ⁵

It is clear, as denominated only by the certification record, that whatever the plaintiffs purchased, their participation was more than a payment agreement to purchase a definable real estate interest. Rather, it is observable that they contractually acquired some character of contributory responsibilities and profit anticipation while the owner of the operating interest retains exclusive control over the drilling operations. In their brief, appellants posit this perception:

"It is a question for the [trial] Court to decide, however, not on the basis of the label defendant would apply to the instrument, but on a complete factual picture of the transaction: the terms of the contract, plaintiff's involvement in the management and operation of the enterprise, defendant's role in promoting and selling it, including the size of the commission it received, and any other facts surrounding the transaction that make clear the investor's relationship to the investment enterprise."

The basic Wyoming case interpretive of the securities act is Gaudina v. Haberman, Wyo., 644 P.2d 159 (1982). In the context of that case as applied to the participation agreement here, "[t]here is no doubt that the investment document was a security." Id. at 163. At issue...