Woodward v. Wright

• Decision Date: 20 April 1959
• Docket Number: No. 5974.,5974.
• Citation: 266 F.2d 108
• Parties: D. A. WOODWARD, J. J. Clancy, Louis S. Slewa, Leslie G. Agasim, Marie E. Linder and Ann Boling, Appellants, v. Homer L. WRIGHT, O. A. Farrell, E. H. Forrest and H. D. Hanna, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

266 F.2d 108 (1959)

D. A. WOODWARD, J. J. Clancy, Louis S. Slewa, Leslie G. Agasim, Marie E. Linder and Ann Boling, Appellants, v. Homer L. WRIGHT, O. A. Farrell, E. H. Forrest and H. D. Hanna, Appellees.

No. 5974.

United States Court of Appeals Tenth Circuit.

March 18, 1959.

Rehearing Denied April 20, 1959.

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R. J. Woolsey, Tulsa, Okl., and N. A. Brown, Chicago, Ill. (Farmer, Woolsey, Flippo & Bailey, Tulsa, Okl., Tillman & Tillman and Don Hampton, Pawhuska, Okl., John B. Durfee, Tulsa, Okl., and Brundage & Short, Chicago, Ill., on the brief), for appellants.

Everette Cunningham, Kilgore, Tex., and Charles R. Gray, Pawhuska, Okl. (W. N. Palmer, Pawhuska, Okl., was with them on the brief), for appellees.

Before HUXMAN, MURRAH and BREITENSTEIN, Circuit Judges.

MURRAH, Circuit Judge.

This is an appeal from a judgment for the defendant-appellees, in an action to rescind a contract for the sale of an undivided interest in oil and gas rights and to recover the amount paid thereon.

The claim is stated in two alternative theories. The first invokes the civil liability provisions of the Securities Act of 1933. § 12(1, 2), Act of May 27, 1933, c. 38, 48 Stat. 84, as amended § 9(1, 2), August 10, 1954, c. 667, 68 Stat. 686, 15 U.S.C.A. § 77l(1, 2). The other is based upon common law fraud and deceit. Federal jurisdiction is conferred by the Securities Act and by diversity of citizenship and requisite amount in controversy. Inasmuch as the civil liability provisions of the Securities Act are said to impose a stricter liability in transactions within its coverage, Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168, it seems appropriate to first consider the applicability of the Act to this transaction.

Section 9(1) of the Securities Act provides in effect that any person who sells a "security" as defined, in violation of the registration requirements of the Act (§ 5, Act of May 27, 1933, c. 38, 48 Stat. 77; as amended § 7, August 10, 1954, c. 667, 68 Stat. 684, 15 U.S.C.A. § 77e) is absolutely liable to the purchaser thereof, for recision or damages. Section 9(2), supra, and Section 17 of the Act of 1933 (as amended by Section 10, of the 1954 Act, 68 Stat. 686) grant recision or damages for fraud and misrepresentation in the sale of the securities generally, whether registered or exempt from the registration requirements under Section 7 of the Act. Wilko v. Swan, D.C., 127 F.Supp. 55; Thiele v. Shields, D.C., 131 F.Supp. 416.

The Securities Act is, however, concerned only with interstate traffic in "securities" as that term is comprehensively defined and the civil liability provisions of the Act (whether § 9(1) or (2) or § 10) have application only to transactions involving "any security". We must therefore determine whether that which was sold constituted a "security". If not, neither Section 9(1) nor (2) nor Section 10 has application. The Act defines "security" as including inter alia, "* * * investment contract * * * fractional undivided interests in oil, gas, or other mineral rights." § 2(1), 48 Stat. 74, 15 U.S.C.A. § 77b(1).

The trial court was of the opinion that the transaction constituted the offering and sale of a "security" by the requisite interstate means. But it did not think the appellees were "issuers" of the security as that term is defined in the Act, because they did not "create a fractional interest in the oil and gas lease for the purpose of public offering." See § 2(4), 48 Stat. 74, 1933, 15 U.S.C.A. § 77b(4). Having decided that the transaction was thus exempt from registration under Section 7, the court concluded Section 9 (1) was inapplicable to this transaction; that although the appellee-sellers made false representations in connection with the offer of sale, the appellant-purchasers were not misled thereby and could not therefore recover under Section 9(2) of the Act. The court thus apparently found it unnecessary to decide the common law theory of appellants' claim.¹

Not every transaction involving the sale of a fractional undivided interest in oil, gas, or other mineral rights is ipso facto the sale of a "security" within the meaning of the Act. It was the manifest Congressional intent to exclude from the scope of the Act isolated sales or assignments of oil and gas leases or fractional parts thereof to specific persons, and to specifically include as securities "only that form of splitting up of mineral interests which had been most utilized for speculative purposes." S. E. C. v. C. M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 124, 88 L.Ed. 88;² Darwin v. Jess Hickey Oil Corp., D.C., 153 F.Supp. 667. This much is made clear when the definition of a "security" as it relates to fractional undivided interests in oil, gas or other mineral rights, is considered in pari materia with definition of an "issuer" of fractional interests in oil and gas as the "owner of any such right or of any interest in such right (whether whole or fractional) who creates fractional interests therein for the purpose of public offering." § 2(4), 48 Stat. 74 (1933), 15 U.S.C.A. § 77b(4). If the seller transfers the whole of what he owns, there can be no creation of a fractional undivided interest in oil and gas, and this is so even though what he sold was a fractional interest therein. It follows, we think, that a fractional undivided interest in oil and gas becomes a "security" when it is created out of the ownership of an interest in oil and gas or other mineral rights for the purpose of sale or offering for sale. Correlatively, the sale or offering for sale of an oil and gas lease, or an undivided interest therein, may be the sale of an "investment contract", hence a security, when the transaction carries with it something more than the assignment of a "naked lease-hold right", as where the purchasers look entirely to the efforts of other persons to make their investment a profitable venture. S. E. C. v. C. M. Joiner Leasing Corp., supra; S. E. C. v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244; Penfield Co. of California v. S. E. C., 9 Cir., 143 F.2d 746, 154 A.L.R. 1070; see Annotation 163 A.L.R. 1050.

The legislative policy however is to bring all "securities" within the regulatory scope of the Act without regard to form or legal terminology, and so we look to the facts to determine whether in reality that which was sold in this transaction can be said to be either an investment contract or the creation of fractional interests in oil and gas. S. E. C. v. Universal Service Ass'n, 7 Cir., 106 F.2d 232, certiorari denied 308 U.S. 622, 60 S.Ct. 378, 84 L.Ed. 519; S. E. C. v. Crude Oil Corp., 7 Cir., 93 F.2d 844.

The pertinent facts are that appellee Wright assigned to appellees Forrest and Hanna an oil and gas lease in Washington County, Oklahoma, retaining for himself an undivided 1/16th interest therein. After drilling and completing two productive wells thereon, Forrest and Hanna, being in financial straits, decided to sell the lease. Wright learned of their plan to sell when another person called him concerning the sale of his 1/16th interest. He thereupon contacted Forrest and Hanna, who offered to sell the lease for $30,000. Wright insisted that it was worth more and it was finally agreed to offer Forrest and Hanna's interest in the lease for $40,000, $30,000 to Forrest and Hanna, and $10,000 to Wright. Wright knew appellant Woodward as a resident of Chicago who had made some unprofitable investments in oil and gas leases in adjoining Osage County, Oklahoma, and in which Wright was also interested as part owner and operator. Woodward knew something about the lease, and in a telephone conversation Wright told him (Woodward) that it could be bought for $40,000 and was worth more. Woodward asked Wright to send him a letter setting out the details, apparently for the purpose of showing it to other parties who Woodward hoped to interest in the venture. Wright thereupon caused appellee Farrell, a public accountant, to write Woodward, giving the description of the lease, the dates of the completion of the wells, depth, and other essential data. The letter went on to state that the "current production" of the first well was 12 barrels per day; that the "current production" of the second well was 32 barrels per day; that "the engineers advise us that at the end of ten years the Number Two well should still be producing at seven barrels per day. We still have the Bartlesville sand to exploit after we are through with the Tucker sand. On the Number One well, when we are through in the Bartlesville, we will go only a few feet and start producing it in the Tucker"; that although he (Farrell) had never before taken an interest in an oil lease, he was taking a 1/16th in this one; and that on the basis of $40,000 for the 15/16ths interest, the purchase price of the remaining would be $35,923.08. The letter also stated that Wright would operate the lease and do the paper work.

After receipt of Farrell's letter, Woodward showed it to appellants Clancy, Sliwa and Agasim, all of whom had also made unprofitable investments in oil and gas ventures in this particular vicinity and were anxious to recoup their losses. Woodward and Clancy came to Bartlesville, and there with Wright met Forrest and Hanna at the lease site. The properties were inspected and production tests made. Then came appellant Sliwa, who, after an inspection and discussion with Woodward and Clancy, telephoned Agasim in Chicago and told him they were purchasing the lease and were holding 2/16ths for him.

After negotiations on price and terms, Woodward, Clancy, Sliwa and Farrell entered into a contract with Forrest and Hanna, in Pawhuska, Oklahoma, to purchase the undivided 15/16ths interest in the leasehold estate for the sum of $40,000, $25,000 to be paid in cash and the balance within two years, secured by a mortgage on the property. The contract specifically...