Wenzel v. Patrick Petroleum Co.

• Decision Date: 28 August 1990
• Docket Number: Civ. A. No. 88-192-JJF.
• Citation: Wenzel v. Patrick Petroleum Co., 745 F.Supp. 211 (D. Del. 1990)
• Parties: James WENZEL and David Crocker, Plaintiffs, v. PATRICK PETROLEUM COMPANY, Defendant.
• Court: U.S. District Court — District of Delaware

745 F. Supp. 211

James WENZEL and David Crocker, Plaintiffs, v.PATRICK PETROLEUM COMPANY, Defendant.

Civ. A. No. 88-192-JJF.

United States District Court, D. Delaware.

August 28, 1990.

Robert D. Goldberg and Christopher Battaglia of Biggs & Battaglia, Wilmington, Dela., Robert A. Holstein, Stephanie Whitman and Aron Robinson of Holstein Mack & Dupree, Chicago, Ill., for plaintiffs.

C. Stephen Bigler of Richards Layton & Finger, Wilmington, Del., Emens Hurd Kegler & Ritter, Columbus, Ohio, for defendant.

OPINION

FARNAN, District Judge.

PlaintiffsJames Wenzel("Wenzel") and David Crocker("Crocker") brought this action on behalf of themselves and a proposed class of plaintiffs.Wenzel and Crocker assert that the defendantPatrick Petroleum Company("Patrick Petroleum") violated § 10(b) of the Securities Exchange Act of 1934,15 U.S.C. § 78j(b)(1988), andRule 10b-5 of the rules and regulations promulgated under § 10(b) by the Securities and Exchange Commission("SEC").17 C.F.R. § 240.10b-5(1990).The violations of law allegedly occurred when the defendant withheld information about Patrick Petroleum's right to redeem warrants issued for Patrick Petroleum's common stock.The withheld information allegedly resulted in damages to the plaintiffs when the warrants were redeemed by the defendant.

In response to the plaintiffs' allegations, the defendant has brought a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6).In determining whether the motion should be granted, the Court must "accept as true the facts alleged in the complaint and all reasonable inferences drawn from them.Dismissal ... is limited to those instances where it is certain that no relief could be granted under any set of facts that could be proved."Markowitz v. Northeast Land Co.,906 F.2d 100, 103(3d Cir.1990).For the reasons stated below, the motion to dismiss will be denied.

I.FACTS

Both plaintiffs are residents of Utah.The defendant, a Delaware corporation with its principal place of business in Jackson, Michigan, is engaged in the development, production and sale of crude oil in the United States.In 1987, Patrick Petroleum offered to the public a securities package consisting of a bond and a warrant.The bond was a debenture of subordinated debt with a principal amount of $1,000 paying 8% interest with a due date in 1997.The warrant, which is an option to purchase the company's securities, allowed the holder to purchase one share of Patrick Petroleum's common stock at a fixed price which increased over a period of three years from 1987 through 1990.

The prospectus which offered the securities to the public disclosed that the warrants had a feature which allowed the defendant to redeem the warrants after January 21, 1988 at fifty cents (50¢) a warrant.The prospectus also revealed that the warrants were detachable from the bonds and therefore subject to be traded separately from the bonds by those who purchased the securities package in the initial public offering.In 1987, the warrants began trading separate from the bonds on the National Association of Securities Dealers' Automatic Quotation System ("NASDAQ").

As the warrants traded on NASDAQ, the warrants became transferred between those who purchased them through the initial public offering to those who acquired the warrants solely through NASDAQ.During this time, Patrick Petroleum published two press releases about the warrants and its 1986 annual report.Neither the press releases nor the annual report mentioned the feature of the warrants which allowed Patrick Petroleum to recall the warrants after January 21, 1988.

Both plaintiffs accumulated positions in the warrants through their purchases on NASDAQ.Wenzel purchased 12,000 and Crocker bought 4300, both believing that the warrants would trade until 1990.In purchasing warrants, the plaintiffs relied on the defendant's press releases.The first press release, issued on February 27, 1987, stated:

Patrick Petroleum Company today announced that its recently-issued 8 per cent convertible subordinated debentures were approved for listing on the New York Stock Exchange National Bond Market and will begin trading today under the symbol PPC 97.The trading symbol will be different for commonly issued retrieval or information systems.

Patrick Petroleum Company recently completed an $8 million offering in the form of units, with each unit including a $1,000 principal amount 8 per cent convertible subordinated debenture due 1997 and 200 three-year warrants, each entitling the owner to purchase one share of Patrick common stock at $4.00 (first year), $4.50 (second year) and $5 (third year).The warrants began trading on the NASDAQ National Market System on January 22, 1987, under symbol PPC-DW.

For further information concerning the Patrick Petroleum Company debenture or warrant securities, contact the managing underwriter for the offering, Paulson Investment Company, Inc. of Portland, Oregon.

Complaint (D.I. 1), Exhibit A.

The second press release, issued on July 8, 1987, delivered a similar message:

Patrick Petroleum Company(PPC) today reported that its previously announced filing of a 10,000 Unit Class B convertible subordinated debenture offering with associated warrants, which has been increased to 11,300 units, was ordered effective today by the Securities and Exchange Commission.The units were priced at $1,045 for a total offering of $11,808,500.Paulson Investment Company, Inc., managing underwriter for the offering, reported that the offering is expected to be closed on July 15, 1987.

Company President U.E. Patrick stated that the offering is in the form of units, with each unit including a $1,000 principal amount 8% convertible subordinated debenture due 1997 and one hundred 3-year warrants, each entitling the owner to purchase one share of Patrick common stock at $4 (first year), $4.50 (second year) or $5 (third year).The warrants are traded via NASDAQ, under symbol PPC-DW.

Each $1,000 principal amount debenture is convertible into 235 shares of Patrick Petroleum Company common stock.The Company has filed an application to trade the debentures on the New York Stock Exchange.

Complaint, Exhibit A1.

On December 27, 1987, the defendant gave notice that the Board of Directors of Patrick Petroleum wanted to redeem the warrants on January 25, 1988 for fifty cents (50¢) a warrant.The warrants had traded at least as high as $1.12 a warrant up until that time.After the redemption, the plaintiffs filed this suit on behalf of all other similarly situated "after market" purchasers, i.e., those purchasers who bought the warrants after Patrick Petroleum's initial offering.Although plaintiffs make an allegation that "Plaintiffs were induced through material misrepresentations to believe the warrants would trade until 1990,"Complaint¶ 17, the substance of the complaint focuses upon the omissions of information about the warrants from the defendant's press releases and 1986 annual report.

The complaint, in describing the omissions for which the plaintiffs' complaint seeks recompense, states:

Throughout the class period, Defendant intentionally or recklessly omitted in news releases and all other publications disseminated to the public, except the prospectus, that PATRICK PETROLEUM COMPANY warrants were recallable at the whim of the company.Defendant knew or should have known that investors such as the Plaintiffs would rely on the information set forth in these releases in purchasing the warrants.Defendant knew or recklessly failed to know that investors such as the Plaintiffs would not have purchased said warrants on the market if the recallable feature of the warrants had been disclosed to the public.

Complaint¶ 23(emphasis added).Plaintiffs thus admit that the redeemability of the warrants was disclosed in the prospectus issued at the time the bond and warrant package was offered to the public.Nevertheless, plaintiffs, denying knowledge of the information in the prospectus, claim that defendant purposely or recklessly omitted information about the warrant's redeemability from its press releases and its 1986 annual report.Such actions allegedly caused "after market" purchasers to buy the warrants and thereby defrauded them.

Instead of answering the complaint, the defendant brought a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) claiming that the plaintiffs had failed to state a claim upon which relief could be granted.In bringing the motion the defendant relies on the disclosure of the warrant's redeemability in the prospectus.The defendant argues 1) that the plaintiffs should be deemed to have "constructive knowledge" of the information in the prospectus regarding the redeemability of the warrants and 2) that the defendant had no responsibility to discuss in its press releases or 1986 annual report the feature of the warrants which allowed them to be redeemed by the defendant.

The Court thus must resolve both issues presented by the defendant's motion to dismiss.The Court therefore will turn first to the argument concerning the plaintiffs' constructive knowledge and thereafter will resolve the argument concerning the press releases and annual report.

II.LEGAL ANALYSIS

A.Constructive Knowledge

In order to prevail under § 10b or Rule 10b-5, a plaintiff must show that the defendant 1) made misstatements or omissions; 2) of material fact; 3) with scienter; 4) in connection with the purchase of sale of securities; 5) upon which the plaintiff relied; and 6) that reliance proximately caused the plaintiff's injury.In re Phillips Petroleum Securities Litigation,881 F.2d 1236, 1244(3d Cir.1989).The concepts underlying § 10bandRule 10b-5 share an affinity with basic tort concepts.SeeStraub v. Vaisman & Co., Inc.,540 F.2d 591, 597(3d Cir.1976);see alsoW. Prosser & W. Keeton, The Law of Torts§ 105 (5th ed. 1984)(listing elements of a fraud cause of action)(footnotes omitted).In...