Wilson v. Al McCord Inc., No. 85-2013

• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)
• Writing for the Court: Before McKAY, SEYMOUR and BALDOCK; BALDOCK
• Citation: 858 F.2d 1469
• Docket Number: No. 85-2013
• Decision Date: 11 October 1988
• Parties: Blue Sky L. Rep. P 72,914 Richard K. WILSON, Christine J. Wilson, Francis R. Caplan, E. Joyce Caplan, and The Karchmer Company, a Missouri general partnership, Plaintiffs-Appellants, v. AL McCORD INCORPORATED, an Oklahoma Corporation, Al McCord a/k/a L.A. McCord, and Rosemary McCord, Defendants-Appellees.

Page 1469

858 F.2d 1469 Blue Sky L. Rep. P 72,914 Richard K. WILSON, Christine J. Wilson, Francis R. Caplan,
E. Joyce Caplan, and The Karchmer Company, a
Missouri general partnership,
Plaintiffs-Appellants,
v.
AL McCORD INCORPORATED, an Oklahoma Corporation, Al McCord
a/k/a L.A. McCord, and Rosemary McCord,
Defendants-Appellees. No. 85-2013. United States Court of Appeals,
Tenth Circuit. Oct. 11, 1988.

Page 1471

Kirk D. Fredrickson, of Watson & McKenzie, Oklahoma City, Okl., for plaintiffs-appellants.

John T. Edwards, of Monnet, Hayes, Bullis, Thompson & Edwards, Oklahoma City, Okl., for defendants-appellees.

Before McKAY, SEYMOUR and BALDOCK, Circuit Judges.

BALDOCK, Circuit Judge.

Plaintiffs-appellants invested in an oil and gas drilling project in the Ringwood-Meno area of Oklahoma. They instituted this diversity action pursuant to 28 U.S.C. Sec. 1332 in July 1982, seeking to rescind their purchase from defendants-appellees of undivided fractional working interests in two wells as violative of Okla.Stat. tit. 71, Sec. 301 (1971), which provides: ¹ "It is unlawful for any person to offer or sell any security in this state unless (1) it is registered under this act or (2) the security or transaction is exempted under Section 401." ² Defendants acknowledged that the interests in the wells, the Emmons # 1 and Nichols # 1, were unregistered securities subject to the strictures of the Oklahoma Securities Act, Okla.Stat. tit. 71, Secs. 1-504 (1971). ³ They maintained, however, that plaintiffs' claims were barred by the three-year statute of limitations contained in Sec. 408(e) of the Act, or in the alternative, that the sales were exempt from registration under Sec. 401(b)(15)A.

The district court agreed that the Sec. 301 action on the Emmons # 1 well was time-barred and entered summary judgment thereon for the defendants. The question of whether the sale of the working interests in the Nichols # 1 was entitled to exempt status was reserved for trial. At the conclusion of the evidence, the court directed a verdict for defendant Rosemary McCord, finding that she exercised no control over the transaction and therefore could not be held liable. The court then instructed the jury on the elements it deemed necessary to establish an exemption for the Nichols # 1 sale. The jury returned a verdict in favor of the remaining defendants. The court denied plaintiffs' post-trial motions and entered judgment on the verdict in March 1985.

On appeal, plaintiffs contend the district court erred in (1) allowing defendants' motion for summary judgment on the Emmons # 1 claim, (2) denying plaintiffs' motion for a new trial on the issue of Rosemary McCord's culpability, (3) denying plaintiffs' motion for judgment notwithstanding the verdict based upon defendants' failure to prove their entitlement to the registration exemption, and (4) denying plaintiffs' motion to reconsider the judgment in view of subsequent Oklahoma case law. Our jurisdiction to review these matters rests upon 28 U.S.C. Sec. 1291. We affirm in part, reverse in part, and remand.

Background

Early in 1979, William Karchmer, a practicing attorney and a partner in the plaintiff Karchmer Co., approached Al Ellison, a client with substantial oil and gas investment experience, about the possibility of investing in a drilling venture. The Karchmer Co., an investment concern, recently

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had sold a sizable amount of property and sought to shelter some of the gain by investing in oil and gas ventures and deducting the intangible well drilling costs.

Although unaware of any opportunities at that time, Ellison later contacted Karchmer about a five-well drilling program in Major County, Oklahoma proposed by developer and defendant Al McCord. Ellison had business dealings with McCord since the early 1970's. McCord, a petroleum geologist, had formed defendant Al McCord, Inc. (AMI) in 1970 for the purpose of obtaining leases and developing wells. AMI was a family-owned business with McCord, its president, holding 51% of the outstanding stock and his wife, defendant Rosemary McCord, holding 49%. Both acted as directors along with a third unnamed party. Rosemary McCord also served as AMI's secretary, but had little influence over its daily operations.

Karchmer conferred with his business associate and brother-in-law, Jerome Caplan, who phoned McCord to request more information about the project. After reviewing the prospectus, Karchmer and Caplan, both of whom were experienced businessmen with some knowledge of the oil and gas industry, decided that the Karchmer Co. should invest in one of the five wells, the Emmons # 1. On May 18, 1979, Jerome Caplan, in his capacity as a partner in the Karchmer Co., signed a letter of agreement for the purchase from AMI of a three-sixteenths working interest in the well.

In the meantime, Ellison had a conversation with plaintiff Richard Wilson in which the subject of McCord's project arose. Wilson, an attorney and long-time friend of Ellison, had invested in McCord's operations on at least three prior occasions. He likewise expressed a desire to minimize taxes and asked Ellison if any interests in the wells remained. Ellison indicated he would check with McCord. Shortly thereafter, Ellison gave Wilson the prospectus. Wilson signed a letter of agreement to purchase a one-eighth working interest in the Emmons # 1 on May 13, 1979.

A third investor in the Emmons # 1 well was plaintiff Francis Caplan. In the late winter of 1979, Jerome Caplan phoned his brother Francis to inquire whether he might be interested in the drilling program. Francis contacted McCord seeking further information. Francis Caplan studied the prospectus and on May 15, 1979, signed his letter of agreement for a one-sixteenth working interest.

The terms of the contracts required plaintiffs to pay 1.33% of the well's drilling and completion costs for each 1% of working interest acquired. This arrangement, commonly referred to in the oil and gas industry as a "third-for-a-quarter" deal, permitted AMI to retain a 25% carried interest, while selling 75% of the leasehold interest to plaintiffs and other investors in exchange for 100% of the drilling and completion costs. McCord testified that the carried interest was compensation for services rendered, including developing the lease, performing geological studies, securing the necessary contractors, employing workers and supervising the entire operation.

The initial reports on the Emmons # 1 were favorable--so favorable that in the summer of 1979, the Karchmer Co., Richard Wilson and Francis Caplan elected to purchase like interests under identical terms in a second well known as the Nichols # 1. The Karchmer Co. executed its agreement with AMI on July 19, 1979. Wilson and Caplan obtained their interests in the Nichols # 1 on July 20 and 31 respectively, designating as named owners their plaintiff-wives, Christine Wilson and Joyce Caplan. Sometime after execution of the contracts, McCord assigned a 6.25% working interest in the Emmons # 1 and Nichols # 1 to Ellison as remuneration for his assistance in bringing the parties together.

Needless to say, what once appeared to be a promising investment turned out to be a dud. Neither the Emmons # 1 nor the Nichols # 1 produced as expected. Costs far surpassed returns. As a result, this lawsuit was commenced on July 19, 1982.

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I.

Plaintiffs first contend the district court improperly granted defendants' motion for summary judgment on plaintiffs' claim that the interests in the Emmons # 1 were unregistered securities in contravention of Oklahoma law. Fed.R.Civ.P. 56 mandates the entry of summary judgment only in the absence of a "genuine issue as to any material fact." McKibben v. Chubb, 840 F.2d 1525, 1528 (10th Cir.1988). The issue for our consideration is the trial judge's legal interpretation of state law to which we give some deference, but ultimately review de novo. See Carter v. City of Salina, 773 F.2d 251, 256-57 (10th Cir.1985) (Seymour, J., concurring) (noting confusion in Tenth Circuit regarding amount of deference to be paid to district court's interpretation of state law).

The district court concluded that Okla.Stat. tit. 71, Sec. 408(e) (1981), barred plaintiffs' request for rescission on their working interests in the Emmons # 1. Section 408(e) provides that no such action may be brought "more than three years after the sale." Sale is defined to include "every contract of sale of, contract to sell, or disposition of, a security or interest in a security for value." Okla.Stat. tit. 71, Sec. 2(13) (1981). Applying this law, the court, faced at the time with a question of first impression, held that because plaintiffs' executed the letters of agreement on the Emmons # 1 prior to July 19, 1979, over three years before filing their complaint, the cause of action was precluded. We agree.

Relying on the Illinois appellate court's decision in Silverman v. Chicago Ramada Inn, Inc., 63 Ill.App.2d 96, 211 N.E.2d 596 (1965), plaintiffs assert that the sale was not consummated until they paid final completion costs on the well and received an assignment of their fractional working interests. Silverman admittedly stands for the proposition that the "sale" of a security continues until the purchasers remit final payment and receive the documents evidencing their interest. But we decline to follow it since we have contrary guidance from an Oklahoma appellate court.

We are persuaded by the Oklahoma Court of Appeals' decision in Adams v. Smith, 734 P.2d 843 (Okla.App.1986). Adams, decided after the notice of appeal was filed in this case, held that the sale of a fractional working interest in an oil well occurs under Sec. 408(e) upon the execution of the letter agreement: "[I]t is clear that the rights of the parties were fixed at the time the letter agreements were signed. Each individual letter agreement was a separate sale...." Adams, 734 P.2d...