Windon Third Oil and Gas Drilling Partnership v. Federal Deposit Ins. Corp.

Decision Date10 November 1986
Docket NumberNo. 85-2211,85-2211
PartiesFed. Sec. L. Rep. P 92,985 WINDON THIRD OIL AND GAS DRILLING PARTNERSHIP, et al., Plaintiffs-Appellants, v. FEDERAL DEPOSIT INSURANCE CORPORATION, et al., Defendants, Peat, Marwick, Mitchell & Co. and A. Marshall Snipes, Defendants-Appellees.
CourtU.S. Court of Appeals — Tenth Circuit

Steven M. Steingard (Mitchell A. Kramer, with him on the briefs), Philadelphia, Pa., for plaintiffs-appellants.

William E. Hegarty of Cahill Gordon & Reindel, New York City (J. William Conger of Hartzog Conger & Cason, Oklahoma City, Okl., Earl D. Mills of Mills Whitten Mills & Mills, Oklahoma City, Okl., and Victor M. Earle, III, and Edwin D. Scott, of Peat, Marwick, Mitchell & Co., of counsel, New York City, with him on the brief), for defendants-appellees.

Before McKAY and MOORE, Circuit Judges, and BROWN, District Judge. *

JOHN P. MOORE, Circuit Judge.

In this appeal from a judgment entered pursuant to Fed.R.Civ.P. 54(b), we are asked to consider whether the district court properly granted the motion for summary judgment, foreclosing plaintiffs' federal securities and pendent state fraud claims from trial on the merits. In light of the Supreme Court's recent decisions in Celotex Corporation v. Catrett, --- U.S. ----, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986), and Anderson v. Liberty Lobby, Inc., --- U.S. ----, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986), we have reviewed the record, exhibits, and briefs and conclude no factual dispute cognizable within federal securities law is present to permit plaintiffs' proceeding to trial on this issue. We therefore affirm the order of the district court.

I.

This litigation surfaced in the aftermath of the insolvency of Penn Square Bank (Penn Square) in Oklahoma City, Oklahoma. Windon Third Oil and Gas Drilling Partnership, Windon Fourth Oil and Gas Drilling Partnership, and Windon Fifth Oil and Gas Drilling Partnership (Windon collectively or plaintiffs/appellants) are Pennsylvania limited partnerships which were formed to acquire fractional interests in oil and gas leases for wells in Oklahoma, Kansas, and Texas. Windon retained Clifford Resources, Inc. (C.R.I.), whose president, Hal Clifford, had previously supervised the exploration, development, and operation of Windon partnership wells. 1 Pursuant to the terms of the partnership plans, the partnership entities executed agreements with Penn Square in which individual limited partners borrowed the capital to purchase an interest in a unit of the limited partnership. Each loan agreement apparently contained an interest reserve clause earmarking 20% of the principal of each note for payment of interest due. When Penn Square was declared insolvent, the Federal Deposit Insurance Corporation (FDIC) and Deposit Insurance National Bank (DINB), 2 appointed receivers of the failed bank, took over the notes and declared them in default for nonpayment of interest allegedly in disregard of the terms of the original loan agreements.

Consequently, Windon 3 and approximately sixty-five individual limited partners 4 filed a complaint alleging breach of contract, common law fraud, and violations of federal securities laws in the United States District Court for the Western District of Oklahoma against the FDIC DINB; three officers of Penn Square, Bill Patterson, Bill P. Jennings, and Eldon L. Beller; Peat, Marwick, Mitchell & Co. (P.M.M. or appellee), an accounting firm that audited the books and records of Penn Square and C.R.I.; and A. Marshall Snipes (appellee), an accountant employed by P.M.M. This appeal concerns only the dismissal of Windon's Counts V and VI for common law fraud and federal securities violations respectively upon summary judgment entered in favor of Mr. Snipes and P.M.M.

In an amended complaint, 5 Windon alleged a violation of 15 U.S.C. Sec. 78j(b) and Rule 10b-5, stating that on October 8, 1979, Robert P. Olson, Windon's representative and general partner, telephoned Mr. Snipes, then a manager of P.M.M., allegedly seeking due diligence information in anticipation of the formation of the Windon partnerships. Responding to Mr. Olson's questions, Mr. Snipes allegedly represented that he and ten other P.M.M. partners invested exclusively with C.R.I.; C.R.I.'s oil reserves were worth several million dollars; C.R.I.'s cash flow was approximately $45,000 a month from its reserves; and P.M.M. partners had invested some $250,000 with C.R.I. personally. Windon alleged Mr. Snipes knew that Mr. Olson was conducting due diligence in the formation of the limited partnerships and that Mr. Olson would rely on his statements. Windon alleged Mr. Snipes failed to disclose that he and several P.M.M. partners had personally obtained loans from Penn Square with the assistance of C.R.I.; that P.M.M. gained additional fees for rendering accounting services to Penn Square; and that P.M.M. partners did not invest exclusively with C.R.I. Windon averred that it discovered the alleged securities violations when Penn Square was declared insolvent. As a consequence of appellee's alleged misrepresentations and nondisclosures, Windon complained it paid more for the investment and sought for its remedy the difference between the cost paid and the actual value of the investment when made or, alternatively, the cost of the investment.

Mr. Snipes and P.M.M. again moved for summary judgment, contending plaintiffs had failed to allege facts to satisfy the elements of a Rule 10b-5 claim; and, absent federal jurisdiction, they further sought dismissal of the state claim for lack of subject matter jurisdiction. Appellees resubmitted Mr. Snipes' original affidavit which averred he received a personal call from a man whose name he did not remember and generally denied he had made each of the representations Windon attributed to him. Windon resisted the motion, countering with Mr. Olson's second affidavit, exhibits, a newspaper clipping, and responses to interrogatories.

In granting summary judgment in favor of P.M.M. and Mr. Snipes, the court characterized Mr. Snipes' statements and opinions as "at most tangential" to Windon's investment decision and ultimately too remote from the subject oil and gas investments to be material within the meaning of Rule 10b-5 as set forth in Zobrist v. Coal-X, Inc., 708 F.2d 1511 (10th Cir.1983). Nor, in the court's assessment, did Windon demonstrate justifiable reliance in light of the remoteness of the statements and the disclaimers and caveats in the Windon Third investment memorandum. The court found no fiduciary relationship existed between Messrs. Snipes and Olson to permit an inference of reliance or, alternatively, to support a separate element of a 10b-5 claim. The underlying claim thus negated, the court rejected as insufficient Windon's factual allegations of Mr. Snipes' and P.M.M.'s knowing participation with Penn Square to support Windon's claim for aiding and abetting liability. With no independent basis for federal jurisdiction, the court then dismissed Windon's state law claim.

II.

In this appeal, Windon urges the district court erred in mischaracterizing this case, focusing only on the misrepresentation rather than on the nondisclosures. Windon contends the court's inability to find material misrepresentations in the offering memorandum underscores the essential nondisclosure of C.R.I.'s financial condition of which it now complains. Windon insists Mr. Snipes' alleged nondisclosures and misrepresentations are material in painting a picture of a financially stable C.R.I. This misrepresentation, Windon alleges, led to the selection of C.R.I. as operator, which, in practical terms, becomes the key to a successful drilling program. In support of its position, Windon cites Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972), which held that in "failure to disclose" cases, positive proof of reliance is not a prerequisite to recovery. Id. at 153. Appellant asks us to apply the proper standard for summary judgment in securities cases, particularly in the light of the wholly contradictory affidavits and evidence of business interlocks between Penn Square, C.R.I., Mr. Snipes, and P.M.M.

In response, appellees contend summary judgment appropriately disposed of Windon's claim of "omissions of immaterial facts ... on an attenuated causal theory against peripheral actors who were not even bystanders to a securities transaction." Although facts may have been disputed, appellees contend no legal significance attaches to those facts under Rule 10b-5.

While the debate over summary judgment continues, 6 the Supreme Court has recently addressed the issues of the movant's burden in summary judgment in Celotex Corp. v. Catrett, --- U.S. ----, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986), and the applicable standard of proof in Anderson v. Liberty Lobby, Inc., --- U.S. ----, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Our review is guided by these discussions. In Celotex, the Court clarified that interpretation of Rule 56(c) in Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970), which placed the burden on "the moving party ... to show initially the absence of a genuine issue concerning any material fact." Id. at 159, 90 S.Ct. at 1609. The Third Circuit had construed this language to require the moving party to "support its motion with affidavits or other similar materials negating the opponent's claim." Celotex, 106 S.Ct. at 2533. Reversing the court of appeals, the Court concluded, "We do not think the Adickes language ... should be construed to mean that the burden is on the party moving for summary judgment to produce evidence of the absence of a genuine issue of material fact, even with regard to an issue on which the nonmoving party bears the burden of proof." Id. at 2554. Instead, the movant's burden under Rule 56 is circumscribed by an initial showing of the absence of evidence to support the nonmoving p...

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