Witter v. Buchanan

Decision Date08 March 1985
Docket NumberNo. 83-2947,83-2947
Parties, 87 Ill.Dec. 131, Blue Sky L. Rep. P 72,225 Lowell WITTER, Norm Freise, Virginia Kreis, Rock C. Kreis, Jon and Nancy Emigholz, Steve and Kimberly Warner, Jim Clapper, Les Broederdorf, Barb Lawrence, David Gottschalk, Michael J. Veverka, Frank J. Shrine, Carl M. Teutsch, Donald S. Williams, Mr. and Mrs. Edward H. Busse, Bessie and Wayne Wright, William L. and Sandra L. Haggard, Edward C. and Loretta Massion, Raymond Massion, Violet Oliver, Larry Rohrssen, Joan and Wally Schank, David and Barbara White, Walter and Shirley Telford, Ron Seavey, Stewart Linderman, Harold Hartwig, Martin Hall and Ladonna and John Beardon, Dean Lenz, Plaintiffs-Appellees, v. Art BUCHANAN and Buchanan Oil Co., a sole proprietorship, Buchanan Truck and Tractor Service and Joyce Buchanan, Defendants-Appellants.
CourtUnited States Appellate Court of Illinois

William J. Harte, Ltd., Chicago (Guy E. McGaughey, Jr., McGaughey & McGaughey, Lawrenceville, of counsel), for defendants-appellants.

Mitchell Ware, Mark E. Jones, Jones, Ware & Grenard, Chicago, for plaintiffs-appellees.

LORENZ, Justice:

This is an interlocutory appeal from an order granting a preliminary injunction in favor of plaintiffs and against defendants. In the underlying cause of action, plaintiffs alleged that defendants owned and operated an oil development business and sold securities to plaintiffs in violation of the Illinois Securities Law of 1953, the so-called "Blue Sky Law." (Ill.Rev.Stat.1981, ch. 121 1/2, pars. 137.1 et seq.) Defendants admit that they are in the oil business, but deny that the transactions at issue involved "securities" within the meaning of the Act. They contend on appeal that plaintiffs failed to show any of the elements necessary to entitle them to a preliminary injunction. With respect to the substance of the Act, defendants contend that the transactions did not involve securities, that defendants did not solicit sales to plaintiffs, that one plaintiff's notice of rescission was not timely, and that plaintiffs' tender was ineffective. Defendants also contend that the trial court improperly issued and continued a temporary restraining order.

A cursory explanation of oil industry terminology may be useful before we set out the facts, but we qualify our explanation by noting that these terms have somewhat amorphous meanings, depending upon particular instruments, transactions and surrounding circumstances. Generally, in exchange for a lease which permits mineral extraction, a landowner receives a "royalty," usually 1/8th of the oil produced or 1/8th of the proceeds from the sale of that oil. The remaining interest in the oil or the proceeds, usually 7/8ths, is called the "working interest." In addition, parties may create "overriding interests," usually in connection with subleases, or they may divide royalties and working interests into fractions. (See Lynn v. Caraway (W.D.La.1966), 252 F.Supp. 858, cert. denied (1968) 393 U.S. 951, 89 S.Ct. 373, 21 L.Ed.2d 362, Black's Law Dictionary 1195 (5th Ed.1979), ("Royalty").) With this background, we summarize the facts as follows.

In March of 1981, plaintiff Lowell Witter met with defendant Arthur Buchanan in a truck stop near Fairfield, Illinois. According to Witter, the two discussed Buchanan's oil drilling activities and Buchanan said that Witter could "get in on" his next well. Buchanan's version differs slightly; he testified that Witter asked to participate in the drilling of his next oil well. In any case, Witter wrote two checks to Buchanan Oil Company, an unincorporated association owned and operated by Arthur and Joyce Buchanan. Witter stated that the first check represented drilling costs and the second, completion costs. The parties agreed that, taken together, the checks entitled Witter to a 1/32d working interest in the well.

From March of 1981 until some time in 1982, defendants entered into similar transactions with each of the plaintiffs: transactions varied only as to the location of the well, the size of the working interest, and the fractional cost of drilling and completion. By and large, plaintiffs first heard about defendants' oil development activities from mutual acquaintances, friends and relatives. In a typical transaction, a plaintiff would call defendants' office and ask what wells were available. One of the defendants would give the name of a well, and the plaintiff would send his or her drilling check, understanding that if the well produced oil, the plaintiff would then send a check for completion. Defendants called several witnesses who had entered into similar agreements with defendants. All of the plaintiffs, as well as defendants' witnesses, testified that in exchange for these payments, they received working interests in the respective wells, and they all considered their payments to be investments.

By the time this action was filed, plaintiffs had paid more than $500,000 and received interests in 21 different wells. These arrangements were not set out in writing; instead, as a well reached completion, defendants listed owners and interests in a formal notice and sent it to the Rock Island Oil Company, which was responsible for selling the oil. Rock Island Oil Company, in turn, issued payments along with "division orders," statements which indicated the recipient's ownership in the well, expressed as a decimal portion of total oil production.

In July of 1982, plaintiffs received bills for operating expenses from defendants, although plaintiffs testified that defendants had never mentioned operating costs. Also during the summer of 1982, several plaintiffs noticed that the decimal numbers listed on their division orders were lower than the fractional interests they had purchased. Defendant Arthur Buchanan testified that the numbers did not match because plaintiffs' interests were computed after royalties were paid, and because their working interests were subject to a variety of "overrides." Buchanan stated further that he retained all of the remaining working interests because he paid whatever excess expenses were not covered by others' payments. Defendant Joyce Buchanan stated that she received an overriding interest in each well because the landowner leased the mineral rights to her and she subleased those rights to the Buchanans' oil business. The Buchanans' son also received overriding interests in some of the wells. Plaintiffs testified that they were not told that the Buchanans' retained overriding interests, and they were not told that Arthur Buchanan acquired working interests without concurrent payment for drilling and completion.

Plaintiffs Rock and Virginia Kreis testified that they contacted Arthur Buchanan on November 16, 1981, and said that they wanted to make an investment for their children. Arthur Buchanan told them that "Jones 14" was a "good well," and they sent Buchanan $11,250. Plaintiffs introduced a report which indicated that defendants knew almost two weeks earlier that Jones 14 was dry. Plaintiff Norman Freise paid completion costs in Jones 14 on November 16, 1981, even though plaintiffs were supposed to pay completion costs only when a well proved productive. Plaintiff Witter paid for drilling costs in Jones 14 nearly four months later.

Plaintiff Witter admitted that he acted as defendants' agent in some of the sales. He further admitted that he asked defendant Joyce Buchanan in December of 1981 whether interests in a well known as "Karl Koertege" had been registered. According to Witter, Joyce Buchanan responded that defendants would file a report seeking exemption of the well from the securities law. Witter stated that in a later conversation, Joyce Buchanan asked him not to date certain checks, because defendants were in the process of filing for the exemption.

Plaintiffs introduced an exemption report for the Karl Koertege well, filed by defendants with the Secretary of State under the "limited offering" provision, section 4 H of the Illinois Securities Law of 1953; that provision exempts oil and gas interests from registration as securities so long as the interest is divided among 35 or fewer investors and the total investment does not exceed $50,000. (See Ill.Rev.Stat.1981, ch. 121 1/2, par. 137.4 H.) Defendants do not dispute that several investors' names were omitted from the report and that the total amount of the investment was understated.

In late August of 1982, Amos Oil Company notified certain plaintiffs that defendants had sold and Amos Oil had purchased three of the wells in which plaintiffs owned interests. In late September, 1982, plaintiffs' counsel received certification from the Secretary of State that defendants had not registered as securities dealers, and that only one exemption report had been filed by defendants. On October 8, 1982, plaintiffs' counsel sent a letter by certified mail advising defendants that plaintiffs elected to rescind the transactions under the securities law.

On October 12, 1982, plaintiffs learned that defendants were negotiating the sale of additional wells in which plaintiffs owned interests. Also on October 12, plaintiffs filed their complaint in the circuit court of Cook County alleging fraud, misrepresentation, conversion and violation of the Illinois Securities Law of 1953; they sought temporary and permanent injunctive relief, an accounting, rescission, and punitive damages. Plaintiffs notified defendants by mail on Friday, October 22d, that they would seek a temporary restraining order (TRO) on Monday, October 25th. After an ex parte hearing, the circuit court granted the motion and restrained defendants from transferring their interests in any of the subject wells.

Defendants appeared on October 29, 1982, through their attorney, Gerald Mayberry. Counsel for plaintiffs and defendants agreed to several extensions of the TRO from...

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