Petition — Davis Oil Co. v. Parvin
Supreme Court brief1980
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re
Gupreme Court, U,
EILED
FEB 23 1980
IN THE
Supreme Court of the United
EL RODAK, JR., ccm”
~~
October Term, 1979
No. ....- sia
“—Fg-1380¢
Davis O1L COMPANY, et al.,
Petitioners,
vs.
A. B. PARVIN,
Respondent.
Petition for a Writ of Certiorari to the United States
Court of Appeals for the Ninth Circuit.
IRWIN F. WOODLAND,
J. EDD STEPP, JR.,
RICHARD CHERNICK,
S. CRAIG TOMPKINS,
GIBSON, DUNN & CRUTCHER,
515 South Flower Street,
Los Angeles, Calif. 90071,
(213) 488-7000,
Attorneys for Petitioners Davis Oil Com-
pany, Jack Davis, Marvin Davis and Paul
Messinger.
Parker & Son, Inc., Law Printers, Los Angeles. Phone 724-6622
SUBJECT INDEX
Page
fA aie 1
pte EEL 2 ll ih aia OE 2
a) = 2
Statutory Provisions Involved ...........................------- 3
RESTA 4
A. Respondent’s Complaint .............................. 4
EE 4
ES ESSE 4
Ne 5
bn cdntenseececece 8
Reasons for Granting the Writ ................2.........-222...- 10
I
This Case Presents Important Issues Concern-
ing the Extraterritorial Effect of State Blue
ES SST sa
The Expansive Extraterritorial Effect Given
to the California Blue Sky Laws by the
Ninth Circuit Conflicts With California Law
and With the Effect Given to Similar Blue
Sky Provisions by the First Circuit and
| Threatens the Validity of Interstate Trans-
tt nicatn agi desekencccn-sennacases----
10
ii.
B. Page
The Ninth Circuit’s Expansive Extraterritoriai
Application of the California Blue Sky Laws
to Apply to a Transaciion Negotiated and
Accepted by Plaintiff in Colorado, Simply
Because the Document Memorializing That
Agreement Wes Signed in California, Con-
flicts With California Law and Presents an
Important Issue as to the Extraterritorial
Effect of That State’s Blue Sky Laws ............ 13
II
The Ninth Circuit’s Approach to Oil and Gas
Joint Ventures Places Severe and Unnecessary
Burdens Upon Parties Wishing to Organize
Such Joint Ventures and Is Contrary to Ap-
DECODES CRTIONIIR LW cin. anon. o svn ecciccseccancennce 15
lil
fe ERR Rey er ona SIRF aS ME TEN 19
Appendix A. The 1979 Opinion ................ App. p. 1
Appendix B. The 1975 Opinion ............................ 9
po Re CRay e E aEe 20
Findings of Fact and Conclusions of Law ............ 22
Memorandum of Decision, Filed June 16, 1976 .. 24
Memorandum of Decision, Filed October 24,
Be tistics ieihitiris ccenoanci beens nes 34
ili.
TABLE OF AUTHORITIES CITED
Cases Page
B. C. Turf & Country Club v. Daugherty, 94 Cal.
App.2d 320, 210 P.2d 760 (1949) ........ 13, 14, 15
Brant v. California Dairies, Inc., 4 Cal.2d 128, 48
if Bee i.) BAR aero 18
Connor v. Great Western Savings & Loan Assn.,
69 Cal.2d 850, 73 Cal.Rptr. 369 (1968) ........... 16
Doherty v. Bartlett, 81 F.2d 920 (1st Cir. 1936),
reh. den., 83 F.2d 259, cert. den., 298 U.S. 676.. 11
Ellena v. State of California, 69 Cal.App.3d 245,
De ea BO CEN ses cas en isentinertbesontnnence 18
Frankenheimer v. Frankenheimer, 231 Cal.App.2d
101, 41 Cal Rots. 656 (1964). .................... 14
King v. Stanley, 32 Cal.2d 584, 197 P.2d 321
BRS pith indigenes dad encheenimdgetlonn a aiauaaeccih 18
Levan v. Legarra, 103 Cal.App.2d 319, 229 P.2d
cg Feet tnte SAAS OFS ORDA E MONRO ERE Par cet COND 11
Oakley v. Rosen, 76 Cal.App.2d 310, 173 P.2d 55
Sb. | Se RE RO LENOS NP DOR ON 10, 11, 14, 16, 17
People v. Miller, 192 Cal.App.2d 414, 13 Cal.Rptr.
I NE ai hii hci sae locate Fightin 16
Robbins v. Pacific Eastern Corp., 8 Cal.2d 241,
ee CE eines psnicnssecsncnersdvutwasenssens Se ie
Stilwell v. Trutanich, 178 Cal.App.2d 614, 3 Cal.
Ss AUN GREE. Gs asian nintiinensnast ean psenipncmpants-esneiasiin 16
UFITEC, S.A. v. Carter, 20 Cal.3d 238, 142 Cal.
se Fe EE Pi coede hte ode dinonse ecinanncsttsexlestdsionpnniss 16
iv.
Page
Union Bank v. Winnebago Industries, Inc., 528
F.2d 95 (9th: Cie: I9TSs cca es 18
United States v. United States Gypsum Co., 333
U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746 (1948) .... 18
Vicioso v. Watson, 325 F.Supp. 1071 (C.D. Cal.
RTE cisecinsicasinsicaissinsse-cotedececedinaonsgasthadstasae aaiieaanaaimia 16, 17
Statutes
California Corporations Code, Sec. 25100(m) ...... 3
California Corporations Code, Sec. 26100 .......... 3, 10
California General Corporation Law, Sec. 25008
anos yeti titi ctec blSunatwaslcaiplaileagsteateaniaie anion: eae 10
California General Corporation Law, Sec. 25017
wine skins nihcoidedeuasn nahi adele cnaI entra 10
California General Corporation Law, Sec. 25102
OED ciiicacionsigercessignicenveinsack staal aaa 5
California General Corporation Law, Sec. 25503
5 ssc neds nlite Sues ie ste i ual aaa 10
Internal Revenue Code, Sec. 761(a) ...................... 8
Securities Exchange Act of 1934, Sec. 27 (48 Stat.
032;°15 USS. TRG) pace ee 4
United States Code, Title 28, Sec. 1254(1) .......... 2
United States Code, Title 28, Sec. 1332 ~................. 4
IN THE
Supreme Court of the United States
October Term, 1979
| RS eases
Davis O1L COMPANY, et al.,
Petitioners,
VS.
A. B. PARVIN,
Respondent.
Petition for a Writ of Certiorari to the United States
Court of Appeals for the Ninth Circuit.
Petitioners Davis Oil Company, Jack Davis, Marvin
Davis and Paul Messinger pray that a Writ of Certiorari
be issued to review the judgment of the Court of
Appeals for the Ninth Circuit in the above-entitled
case.
OPINIONS BELOW.
The opinion of the Court of Appeals for the Ninth
Circuit (the “1979 Opinion”) is set forth in Appendix
“A” and has not yet been officially reported. This
is the second Opinion by the Ninth Circuit in the
case. In its first Opinion (the “1975 Opinion”), offi-
cially recorded at 524 F.2d 112, the Court of Appeals
reversed the initial judgment issued by the District
Court below and remanded the case for proceedings
consistent with its opinion. A copy of this opinion
is set forth in Appendix “B”. The Judgment and Find-
ings of Fact and Conclusions of Law of the District
on. Tae
Court for the Central District of California was entered
on January 14, 1977. The Findings of Fact and Con-
clusions of Law include by reference the Court’s Memo-
randum of Decision filed on October 24, 1973 (the
“1973 Opinion”) as modified and amended by the
Court’s Memorandum of Decision filed June 16, 1976
(these four documents are collectively referred to herein
as the “1977 Opinion”). A-copy of the 1977 Opinion
is set forth in Appendix “C”. The District Court’s
1977 Opinion has not been officially reported.
JURISDICTION.
The Judgment of the Court of Appeals for the Ninth
Circuit was entered on November 26, 1979. This Peti-
tion for Writ of Certiorari was filed within ninety
days of such entry. The jurisdiction of this Court
is invoked pursuant to 28 U.S.C. § 1254(1).
QUESTIONS PRESENTED.
Plaintiff A. B. Parvin, “a highly sophisticated busi-
nessman, knowledgeable in oil investments” seeks to
enjoy risk-free participation in certain oil exploration
projects by rescinding his participation in those specific
projects which failed to produce a profit and by collect-
ing statutory interest from the initial date of his partici-
pations therein.
The questions presented are:
I
Whether the extraterritorial reach of the California
blue sky laws is so great as to void agreements ne-
gotiated and entered into in good faith outside of
California simply because either (a) payment was made
by a check mailed from California or (b) the written
sinilins:
documentation memorializing the agreement was signed
by buyer in California.
II
Whether the unrevealed intent of participant in an
oil exploration project not to treat his participation
therein as a joint venture is sufficient to negate objec-
tive evidence, including the parties’ written agreement,
of such joint venture participation.
Ill
Whether oil drilling programs which retain for par-
ticipants the right to control significant risk related
decisions, including issues relating to well development
and the marketing of any product produced, are ren-
dered void merely because participants have elected not
to exercise control over day-to-day drilling operations.
STATUTORY PROVISIONS INVOLVED.
At all times relevant to this case, former California
Corporations Code § 25100(m) provided as follows:
“Except as otherwise expressly provided in this
division, the Corporate Securities Law does not
apply to any of the following classes of securities:
* * *
“(m) any bona fide joint venture interest, except
such interest when offered to the public.”
Prior California Corporations Code § 26100 provided
that:
“Every security of its own issue sold by any
company without a permit of the commissioner
then in effect authorizing the issuance or sale
of the security is void.”
emibbicin
STATEMENT OF CASE.
A. Respondent’s Complaint.
Respondent's Complaint, filed on July 13, 1970,
presents state and federal claims seeking the return
of all monies paid to Petitioner Davis Oil Company
(“DOC”) pursuant to ResponJent’s participation in
three separate oil drilling projects. Jurisdiction in the
federal courts was based upon Section 27 of the Se-
curities Exchange Act of 1934, 48 Stat. 881, 15
U.S.C. § 78(aa) and, as Respondent is a citizen of
California and Petitioners are all citizens of Colorado,
on the basis of diversity of citizenship (28 U.S.C.
§ 1332). The Court of Appeals for the Ninth Circuit
upheld the District Court’s Judgment on the basis of
Respondent’s state claims. These claims alleged that
(i) the participation agreements between Respondent
and DOC were securities under California law which
could only be sold pursuant to permit; (ii) no permits
were obtained; and (iii) that such sales were accord-
ingly void. The Court of Appeals did not address
Respondent’s claims under the Securities Exchange Act
of 1934.
B. Statement of Facts.
1. Parties.
Petitioner DOC is a partnership engaged in the oil
exploration business. Its principal place of business
is in Denver, Colorado, and all of its partners (includ-
ing Petitioners Jack Davis and Marvin Davis) are resi-
dents of Colorado. Paul Messinger is an employee
of the partnership and likewise a resident of Colorado.
pre as
Respondent A. B. Parvin is a highly sophisticated
businessman, knowledgeable in vil investments (Ap-
pendix “C” at page 54), and a resident of Beverly
Hills, California. Not including his transactions with
DOC, Respondent has over the years participated in
more than a dozen oil ventures (CR 640'). He is
also a man prone to manipulate the laws regulating
securities transactions to attempt to recover his invest-
ments in those ventures in which he has become dissatis-
fied. (RT 87-90; see also the unreported decision in
A. B. Parvin v. Fulk, (C.D. Cal. 1972) Civil No.
71-1118-LTL.)
2. The Oil Ventures.
At the time of Respondent’s participations, certain
joint venture agreements were exempted from Califor-
nia’s permit requirements.*? Respondent participated
with DOC in three separate oil ventures, identified
below as the “Savoie”, “Offset” and “Wildcat” projects.
The District Court found these projects not to constitute
joint ventures, and this finding has been approved by
the Court of Appeals. Petitioners contest this character-
ization.
1The record on appeal below consists of 5 volumes: The
Clerk’s Record, volumes I, II, III and supplement consists
of 750 pages and will be referred to herein as “CR”, followed
by a number or numbers designating the page or pages of
the Clerk’s Record to which the reference is made. The Re-
porter’s Transcript consists of 337 pages and will be referred
to herein as “RT”, followed by the number or numbers designat-
ing the page or pages of the Reporter’s Transcript to which
the reference is made.
Plaintiff's exhibits are designated 1 through 152, and defend-
ant’s exhibits are designated E through HU. Plaintiff’s exhibits
will be referred to herein as “PX” and defendant’s as “DX”.
Today that exception is contained in modified form in Cali-
fornia General Corporation Law § 25102(f).
saiailiinds
The first of the participation agreements (the Savoie
project) was consummated in 1968 following seven
years of social and business dealings between Petitioner
Marvin Davis and the Respondent. The facts surround-
ing the offering and consummation of this participation
agreement are disputed. Petitioner Marvin Davis testi-
fied that the participation agreement was both offered
and accepted in Colorado. Respondent asserts that the
offer was made in a telephone call to him in Los
Angeles. The parties’ agreement was never reduced
to writing.
The participation agreements pertaining to the Offset
and Wildcat projects were reduced to writing. These
agreements were mailed to Respondent from Denver
to Los Angeles, executed by him in Los Angeles and
returned to Colorado. In the case of the Wildcat project,
the terms were fully negotiated and accepted in Colo-
rado prior to execution of the document memorializing
that agreement (Appendix “B” at page 11).
The written agreements memorializing the Offset
(PX 26; CR 90-119) and Wildcat (PX 36; CR 124-
152) projects were copies of the form agreement gen-
erally used in the oil industry to structure joint oil
ventures and provided Respondent with substantial
and ongoing participation in and right of control over
those projects (RT 163). Specifically, the agreements
provided Respondent with each of the following con-
trols:
(i) Respondent had at all times complete and
free access to the derrick floor and to all informa-
tion obtained in the course of drilling, including
daily drilling reports, final prints of all electrical
surveys run, all core analyses, drill-stem test
aed
+ J4eae~
=
charts, completion reports and governmental and
geographical reports.
(ii) Unanimous consent of all parties, includ-
ing Respondent, was required to drill additional
wells, rework, plug-back or deepen authorized
wells, and to settle lawsuits for an amount in
excess of $1,000.
(iii) Subject to certain exceptions, no single
project could be undertaken without the consent
of all the parties unless the project was reasonably
estimated to require an expenditure not in excess
of $5,000.
(iv) Respondent had the right to avoid further
financial commitments to a particular drilling
project by opting out at the casing point.*
(v) Respondent, in the event he elected to
proceed in the development of the well past the
casing point, vas entitled to separately receive
and market any production realized therefrom.
Respondent had no day-to-day control over the physical
drilling of the well, as DOC had been retained by
the venture to serve as general contractor for the
drilling operations.
The participation agreements were substantially
similar to that executed by Respondent with Occidental
Petroleum Corporation, which is apparently accepted
by Respondent as establishing a joint venture. More-
over, Respondent has admitted that the participation
agreements were something more than mere investment
8The casing point is that point at which the decision is
typically made whether to incur the further expenses neces-
sary to prepare a well for production including the insertion
of pipe into the hole, or in the alternative, to abandon the
project.
citileee
contracts, referring to DOC as his partner in certain
correspondence with Marvin Davis.
For tax purposes, the participation agreements were
treated by DOC as an “organization” availed of for
the “joint production, extraction, or use of property”
under Section “761(a) of the Internal Revenue Code.
Respondent concedes that the terms of his oral agree-
ment with the Petitioners pertaining to the Savoie proj-
ect were substantially similar to the terms of the Offset
and Wildcat projects.
DOC did not obtain a permit from the California
Commissioner of Corporations for the offer or sale
of the participating agreements to Respondent. But
neither did it intentionally seek to evade California
law (See, Appendix “B”).
3. Prior Opinions.
The District Court initially found the participation
agreements not to constitute securities for purposes
of the California or federal securities laws. The Dis-
trict Court further found (on disputed evidence as
to where the agreements were negotiated and agreed
to) that “the transactions were consummated and the
contracts entered into outside the State of California
and extrinsic to any conversations between the parties
conducted by telephone.”
In its 1975 Opinion the Court of Appeals reversed,
finding the participation agreements to constitute se-
curities and further finding each of the transactions
to have involved a “sale” of securities in California,
OL te. ele ASR TAG, tes - y
PP ee Pn ee ee
teil
triggering the California permit requirement. In the
case of the Savoie project, the signing of a check.
in Los Angeles was found to constitute the “sale”.
In the case of the Offset and Wildcat projects, the
sending of the agreements to Respondent in Los Angeles
and his execution thereof in that city were held to
constitute the “sales” even though all the terms of
the Wildcat agreement had been previously agreed to
in Colorado. Having so ruled, the Court of Appeals
remanded.
In its 1977 Opinion, the District Court found Re-
spondent, as a matter of law, to have had an insufficient
right of control over the essentials of the drilling opera-
tions to be a joint venturer. The District Court also
found that the circumstances of the case “failed to
establish an intent to create joint venture”. The Court
of Appeals, in its 1979 Opinion, upheld these findings
and affirmed, characterizing the joint venture issue
as one fact, and affirming the District Court’s opinion
on the basis of (i) the District Court’s finding that
“the major decisions—those most affecting the ultimate
success or failure of the enterprise—were to be made
solely by the defendants;” and (ii) the District Court’s
purported finding that “the parties themselves never
intended to create a joint venture.”
a
REASONS FOR GRANTING THE WRIT.
I
THIS CASE PRESENTS IMPORTANT ISSUES CONCERN-
ING THE EXTRATERRITORIAL EFFECT OF STATE
BLUE SKY LAWS.
A.
The Expansive Extraterritorial Effect Given to the
California Blue Sky Laws by the Ninth Circuit
Conflicts With California Law and With the Effect
Given to Similar Blue Sky Provisions by the First
Circuit and Threatens the Validity of Interstate
Transactions. :
The Court of Appeals for the Ninth Circuit ruled
below that the mere signing of a check in California
is, in and of itself, a “sale” in California and triggers
that state’s blue sky law provision which renders void
certain securities if issued or sold in California without
a permit (California Corporations Code § 26100).*
This ruling was not based upon any analysis of the
legislative history underlying the California blue sky
laws nor was it based upon any California case reaching
a similar result. Rather, the Court of Appeals founded
its expansive reading solely upon the proposition that
as the statute is designed to protect purchasers, it
should be broadly construed.
The Court of Appeals decision is in direct conflict
with the California Court of Appeal case, Oakley
v. Rosen, 76 Cal.App.2d 310, 173 P.2d 55 (1946).
There the Court found that state’s blue sky laws to
‘The California blue sky laws were substantially modified
in 1968. The provision allowing rescission in the case of
sales in violation of the California permit requirement is
now contained in California General Corporation Law § 25503.
The definition of the terms “sale”, “sales” and “offers to sell”
are set forth in Sections 25008 and 25017.
= |) ae
have no application to a transaction executed in New
York, even though the agreement was signed by one
of the plaintiffs in California and funds under such
agreement transmitted from California to New York,
where the final act necessary to effect the agreement
was done beyond the borders of California. Admittedly,
the California statute has been modified since the Oak-
ley decision was rendered. However, later cases support
Oakley’s continued validity. In Levan v. Legarra, 103
Cal.App.?2d 319, 229 P.2d 383 (1951), the Court
by implication likewise found the mere execution of
a check in California to be insufficient to justify applica-
tion of the California blue sky laws.
Moreover, the Ninth Circuit’s interpretation of the
term “sale” to include the execution of a check in
California is in direct conflict with the First Circuit’s
interpretation of the same term under the New Hamp-
shire blue sky law. See Doherty v. Bartlett, 81 F.2d
920 (1st Cir. 1936), reh. den.,.83 F.2d 259, cert.
den., 298 U.S. 676. The New Hampshire statute there
prohibited the sale, offer for sale or invitation of offers
for or inquiries about securities by a person not regis-
tered as a dealer thereunder. Sales made in violation
of that statute were held by the court therein to be void.
In that case, the First Circuit ruled, inter alia, that
the mere mailing of a check by the plaintiff from New
Hampshire to Boston was not sufficient to constitute
a sale, offer for sale or invitation of an offer in
New Hampshire. As is the case in the opinion below,
that ruling was not based upon any review of relevant
legislative history.
The approach adopted by the Ninth Circuit exposes
the validity of interstate transactions to significant un-
certainty. Even in cases where a transaction is com-
ro) es
pletely negotiated and executed within a state allowing
such transactions, the Ninth Circuit’s approach imposes
upon issuers the risk that buyers will use a foreign
state’s blue sky laws to engineer a no-risk investment
by the simple device of mailing any payment required
of them from such foreign state. Such an interpretation
does nothing to advance a state’s interest in protecting
its residents. Indeed, in the case of California, such
an expansive reading is in direct conflict with the
position expressed by the California Supreme Court in
Robbins v. Pacific Eastern Corp., 8 Cal.2d 241, 273-
274, 65 P.2d 42 (1937), that investors should not
be allowed to undo obligations, entered into by others
in good faith, by reliance upon expansive interpretations
of the California blue sky laws.
“It is no answer to point out, as do appellants,
the strong public policy behind the corporate se-
curities act. That statute is undoubtedly a salutary
law. The same can be said of the usury law,
the statutes restricting corporate action, and many
other statutes to which the rule of construction
here being discussed has been applied. This rule of
interpretation must be applied by the courts, unless
a contrary construction is compelled by the terms
of the contract. It is peculiarly applicable in the
present case where the plaintiffs, and the other
stockholders, got exactly what they wanted and
what they bargained for—where no fraud or im-
position has been proved—and where they are
now trying to recoup their losses, by a strained
and technical construction of the contract, from
what turned out to be a bad bargain.”
Robbins v. Pacific Eastern Corp., 8 Cal.2d 241,
273, 65 P.2d 42, 59.
— we
Or, as noted by the California Court of Appeal in
B. C. Turf & Country Club v. Daugherty, 94 Cal.App.
2d 320, 210 P.2d 760 (1949):
“While regulation is necessary in this field, and
honest, legitimate business must, under the police
power, submit to reasonable controls in order to
effectuate the purpose of the statute, the controls,
by strained construction, should not be extended
to wholly unnecessary, unreasonable or absurd
lengths. The courts must approach this problem
with some degree of realism.”
B. C. Turf & Country Club v. Daugherty, 94
Cal.App.2d 320, 330, 210 P.2d 760, 766.
Unless this Petition is granted and the holding below
reversed, it will stand as precedent for an extraordinarily
expansive application of the extraterritorial reach of
the California blue sky laws in effect from time to
time. As most state securities issues are combined with
claims under the federal securities laws and _ tried
in the federal courts, such a precedent will seriously
undermine the pragmatic approach adopted by the Cali-
fornia courts, and will likewise seriously undermine
the validity of interstate transactions.
B.
The Ninth Circuit’s Expansive Extraterritorial Applica-
tion of the California Blue Sky Laws to Apply to
a Transaction Negotiated and Accepted by Plain-
tiff in Colorado, Simply Because the Document
Memorializing That Agreement Was Signed in
California, Conflicts With California Law and
Presents an Important Issue as to the Extraterri-
torial Effect of That State’s Blue Sky Laws.
The District Court, in its Memorandum of Decision
dated October 24, 1973, determined that “the transac-
a eA
tions were consummated and the contracts entered
into outside of the State of California and extrinsic
to any conversations between the parties conducted
by telephone” (Appendix “C” at page 55). The Circuit
Court acknowledged that, as to the Wildcat transaction,
there was evidence that Respondent orally agreed to
participate in the program while in Colorado and that
the terms of the Agreement were settled at that time
(Appendix “B” at pages 11 and 16). Still, the Court
of Appeals ruled that for purposes of the California
blue sky laws, as they then stood, a sale had been
made in California.
This expansive reading of the extraterritorial effect
of California’s blue sky laws is contrary to applicable
California law. California law looks not to the place
of the signing, but to the place where the last act
occurred necessary to create a contract. See B. C.
Turf & Country Club v. Daugherty, supra; and Oakley
v. Rosen, supra. This expansive reading is also con-
trary to the policy enunciated by the California courts,
discussed above, that that state’s voiding provisions
not be construed in such a contorted manner as to
undo transactions entered into by others in good faith
5It would be incorrect to argue that the California statute of
frauds makes California the situs of the Wildcat agreement
Even if the statute of frauds were applicable, it would go
to the contract’s enforceability in court and not to the creation
thereof. Furthermore, that statute may be waived either expressly
or by conduct. A writing is necessary for the creation of
a contract only where such is the intent of the parties. See,
e.g., Frankenheimer v. Frankenheimer, 231 Cal.App.2d 101,
108-109, 41 Cal.Rptr. 636 (1964). The presence or absence
of such an intent is a matter of fact (Frankenheimer v.
Frankenheimer, supra). In the instant case, the District Court
found against the existence of any such intent when it rendered
its ruling that the Wildcat agreement was consummated and
entered into outside of California. As mentioned above, this
finding was not challenged by the Court of Appeals.
ee
and beyond the boundaries of California. Robbins
v. Pacific Eastern Corp., supra; B. C. Turf & Country
Club v. Daugherty, supra.
Unless this Petition is granted and the decision below
reversed, it will stand as precedent for an unreasonably
expansive interpretation of the extraterritorial reach of
California’s blue sky laws in effect from time to
time. As the justification for such a broad application
is founded solely upon the Ninth Circuit’s opinion
that such a broad application is necessary to protect
purchasers, it is a precedent whose impact goes sub-
stantially beyond the wording of whatever California
statute may be then in effect.
II
THE NINTH CIRCUIT’S APPROACH TO OIL AND GAS
JOINT VENTURES PLACES SEVERE AND UNNECES-
SARY BURDENS UPON PARTIES WISHING TO
ORGANIZE SUCH JOINT VENTURES AND IS CON-
TRARY TO APPLICABLE CALIFORNIA LAW.
This nation has committed itself to the pursuit and
achievement of energy sufficiency. If this goal is
to be met, energy exploration must be encouraged
and the erection of new barriers to the flow of capital
into this area must be discouraged. The interpretation
of the California joint venture exception adopted by
the court below is out of step with this commitment.
It has resulted in the striking down, as a void security,
of one of the standard form oil exploration participation
agreements used by the oil industry. In so holding, the
court below has severely diminished the utility of a very
valuable form of oil exploration transaction and has
erected a new and substantial barrier to the creation
of oil exploration joint ventures.
a
The District Court ruled that “as a matter of law”
the various agreements did not constitute joint venture
agreements under the California statute. The Court
of Appeals affirmed that finding on the basis of the
District Court’s findings that those decisions most affect-
ing the ultimate success or failure of the enterprise
were to be made solely by DOC and that the parties
themselves never intended to create a joint venture.
In so ruling, the Court of Appeals failed to realize
that, in California, it is not actual control but the
“right” to control significant decisions which is essential
to a joint venture. See UFITEC, S.A. v. Carter, 20
Cal.3d 238, 142 Cal.Rptr. 279 (1977); Connor v.
Great Western Savings & Loan Assn., 69 Cal.2d 850,
73 Cal.Rptr. 369 (1968); People v. Miller, 192 Cal.
App.2d 414, 13 Cal.Rptr. 260 (1961); Stilwell v.
Trutanich, 178 Cal.App.2d 614, 3 Cal.Rptr. 285
(1960); Oakley v. Rosen, 76 Cal.App.2d 310, 173
P.2d 55 (1946); and Vicioso v. Watson, 325 F.Supp.
1071 (C.D. Cal. 1971). In so ruling the Court of
Appeals also misinterpreted the District Court’s finding
as to intent and failed to give proper deference to
the California objective rule of contracts.
California does not require that all members of a
joint venture participate equally in the day-to-day opera-
tions of the venture. As stated by the Court in Stilwell
v. Trutanich a joint venture may exist
“although the property forming the capital of the
adventure is not jointly owned by the parties...
and although one of the parties has contributed
money, another property and another skill... .”
Stilwell v. Trutanich, 178 Cal.App.2d 614, 619,
3 Cal.Rptr. 285, 288.
* re -
poe Nae
Or, as stated in the often cited case, Oakley vy. Rosen,
supra at 76 Cal.App.2d 310, 313-314:
“The fact that appellee was to produce the play
without the assistance of appellants makes it none-
theless a joint venture. Many successful enterprises
owe their pronounced achievements to the program
and direction of a single mind.”
Oakley v. Rosen, 76 Cal.App.2d 310, 313-
314, 173 P.2d 55, 57.
In Vicioso v. Watson, supra, the question also in-
volved the joint venture status of an oil participation
agreement. There the Court found the existence of
a joint venture despite a lack of direct control by
the plaintiff.
“Under the terms of the contract in our case,
plaintiffs were to receive daily drilling reports,
they were welcome at the drilling sites, they were
not billed for the cost of production after it was
undertaken, but provided the cost of drilling in
proportion to their interest prior to the undertaking
of the drilling. I conclude that the plaintiffs had
a right to control the drilling operations, but de-
ferred exercise of this control and chose to rely
on the greater expertise of the defendant. In light
of the interpretation of the term ‘right to control’
and the general concept of joint venture . . ., it
seems clear that a joint venture existed in the
present suit.”
Vicioso v. Watson, 325 F.Supp. 1071, 1076.
In the instant case, Respondent had all the rights
and controls identified, supra. Under the standards
applied by the California courts, these controls should
a ol
have been more than sufficient. The fact that Respond-
ent and his fellow joint venturers chose to retain DOC
as an independent contractor to supervise the day-to-
day line operations does not negate the existence of
a joint venture.
The Court of Appeals also purports to rely upon
the District Court’s findings relating to intent. However,
whereas the Court of Appeals interpreted the District
Court’s opinion as finding an intent not to create
a joint venture, the District Court in fact went no
further than to find that the circumstances surrounding
the agreements failed to establish an intent to create
a joint venture. In relying upon this finding, the Court
of Appeals failed to heed the warning contained in
United States v. United States Gypsum Co., 333 US.
364, 396, 68 S.Ct. 525, 92 L.E d. 746 (1948), that
where oral testimony is in conflict with contemporane-
ous documents, the Court can give it little weight,
particularly where the crucial issues involved are, as
here, mixed ones of fact and law.
In placing such heavy reliance upon this intent
issue, the Court of Appeals also failed to heed the
objective theory used to interpret contracts by the Cali-
fornia court. See King v. Stanley, 32 Cal.2d 584,
591, 197 P.2d 321 (1948); Brant v. California Dairies,
Inc., 4 Cal.2d 128, 133, 48 P.2d 13 (1935); Ellena
v. State of California, 69 Cal.App.3d 245, 262, 138
Caf.Rptr. 110 (1977); Union Bank v. Winnebago In-
dustries, Inc., 528 F.2d 95, 99 (9th Cir. 1975).
oa
In the instant case, the uncontroverted provisions
of the participation agreements themselves were clearly
sufficient to establish a joint venture. The Court below,
however, chose to look (i) to the extent to which
control was actually exercised by Respondent and (ii)
to Respondent’s unspoken intent not to treat the trans-
action as a joint venture. This approach improperly
interprets the joint venture exception, as it fails to
recognize that it is the right to control and not the
actual exercise of control which is required and fails
to give proper weight to the undisputed terms of the
parties’ agreements. It is a burdensome precedent, in
that it makes virtually any joint venture agreement
subject to attack by simple allegation that one of
the parties involved did not “in fact” exercise control
and that he never intended the agreement to constitute
a joint venture. It is a precedent which is contrary
to law, and to this nation’s energy development needs.
Ill
CONCLUSION.
The Ninth Circuit has interpreted California_law
to require expansive extraterritorial application of its
blue sky laws and as requiring an actual exercise
of control over day-to-day operations before an agree-
ment may be deemed a joint venture. The Ninth Circuit
has also failed to accord proper significance to the
undisputed terms’ of the written agreemeni between
the parties. This decision constitutes a precedent which
is at odds with California law and which poses both
oo
a substantial threat to the validity of interstate trans-
actions and a substantial burden upon persons wishing
to establish oil and gas joint ventures in California.
If state blue sky laws are to be kept within their
proper bounds and if oil and gas exploration in this
country is to be encouraged, this precedent must be
reversed.
For these reasons, Petitioners respectfully submit that
a Writ of Certiorari should issue.
Respectfully submitted,
IRWIN F. WOODLAND,
J. Epp STEppP, JR.,
RICHARD CHERNICK,
S. CRAIG TOMPKINS,
G1BsOoNn, DUNN & CRUTCHER,
Attorneys for Petitioners Davis Oil
Company, Jack Davis, Marvin Davis
and Paul Messinger.
AON
Pe. -
APPENDIX “A”.
Opinion.
United States Court of Appeals for the Ninth Circuit.
A. B. Parvin, Plaintiff-Appellee and Cross-Appellant,
v. Davis Oil Company, Jack Davis, Marvin Davis,
and Paul Messinger, Defendants-Appellants and Cross-
Appellees. No. 77-1663; No. 77-1664.
Filed: Nov. 26, 1979.
Appeal from the United States District Court for
the Central District of California.
Before: CHAMBERS and HUFSTEDLER, Circuit
Judges, and FITZGERALD,* District Judge.
HUFSTEDLER, Circuit Judge:
Parvin sued Davis Oil Company (“DOC”) for dam-
ages arising from three investment contracts that Parvin
contended violated both California and federal securities
laws. The district court initially dismissed the action
finding that (1) the oil and gas lease interests were
not securities under either California or federal law,
(2) the transactions did not involve sufficient contacts
with California to permit application of California law,
and (3) the transactions were private offerings ex-
empted from the registration requirements of the Securi-
ties Act of 1933. We reversed (Parvin v. Davis Oil
Co. (9th Cir. 1975) 524 F.2d 112), and we remanded
the cause to the district court to decide whether the
securities qualified under the joint-venture exception
to the California permit requirement and whether Parvin
had the kind of access to information that would have
appeared in the registration statement.
*Honorable James M. Fitzgerald, United States District Judge,
District of Alaska, sitting by designation.
Stl on
On remand, the district court found that these trans-
actions failed to qualify under the joint venture excep-
tion under California law and that they failed to qualify
under the private offering exception from the registra-
tion requirements under the Securities Act of 1933.
The district court held further that DOC’s failure to
inform Parvin that the securities were not registered
under either California or federal law constituted a
violation of § 10(b) of the Securities and Exchange
Act of 1934. Therefore, the district court decided that
Parvin was entitled to the return of the money he
had invested. The district court denied an award of
prejudgment interest, exercising discretion that the court
believed it had under applicable California and federal
law.
DOC appeals from that portion of the judgment
holding the joint venture exemption and the private
offering exemption inapplicable. Parvin appeals from
that portion of the judgment declining to award prejudg-
ment interest.
Parvin is a retired California businessman who has
had substantial experience with investment in oil and
gas properties. DOC is a partnership composed of
Jack Davis, Marvin Davis, and Jean Davis, which
has its principal place of business in Denver, Colorado;
it is engaged in oil and gas exploration. Parvin main-
tained a periodic social and business relationship with
the Davises from the early 1960s until the beginning
of this litigation. During 1968, DOC offered and sold
to Parvin investments in three separate DOC oil and
gas drilling programs, referred to respectively as the
“Savoie,” “Offset,” and “Wildcat” programs.
The investors in the Savoie, Offset, and Wildcat
leases were composed of three separate groups. Gen-
a
a we
erally speaking, each group had been put together
by a friend or a business associate of the Davises
and was composed of that person and a number
of his friends and business associates. Each member
of the group signed an agreement with DOC that was
identical with the agreement signed by everyone else,
with the exception of the names of the parties, the
percentages of their interests, the amounts of their
payments, and the names of well prospects included.
(Parvin himself was an exception to the extent that
he did not execute a written agreement for the Savoie
lease. )
The Davises never met with these investing groups,
and there was no interaction between the different
groups or their members. The Davises selected the
leases ‘to be invested in and the sites to be drilled.
They also conducted both the exploration and the
drilling. Under the terms of the agreement, the individ-
ual investors did have the right to receive daily drilling
reports, final prints of all electrical surveys run, all
core analyses, drill-stem test charts, completion reports
and governmental and gevgraphical reports. They also
had free access to the derrick floor and to all informa-
tion obtained in the course of drilling.
In the case of the Savoie lease, DOC drilled an
unsuccessful well and none of the participants received
any income from his interest in the project. The under-
lying oil and gas leases have, by their terms, expired.
Parvin invested $15,000 in this project. DOC drilled
four wells on the Offset project. Three of the wells
were plugged and abandoned, and the leases under-
lying them have expired. The fourth well was sold
to another company in 1969. Parvin paid DOC $92.-
651.78 and received a return of $2,008.67 on the
uid
Offset leases. Similarly, four wells were drilled under
the Wildcat lease and three of the wells were plugged
and abandoned. The fourth produced some oil for
a time, but none recovered its costs. Parvin paid DOC
$103,740.80 and eventually received a return of $4,-
422.71. If Parvin prevails under either California or
federal law, he is entitled to rescind and to recover
his investments, less the amount he has received.
I
This action arose under the old California Cor-
porate Securities Law (Cal. Corp. Code §§ 25000
et seq. (West 1954)), as amended as of January 2,
1969. Section 25100 of that law requires an issuer
of a security, such as DOC, to obtain a permit before
selling any security, unless it falls under one of the
enumerated exemptions to that requirement. DOC
argues that the joint venture requirement is applicable.
California courts have defined a joint venture as
“an undertaking by two or more persons jointly to
carry out a single enterprise for profit.” (Stilwell v.
Trutanich (1960) 178 Cal. App. 2d 614, 3 Cal. Rptr.
285, 288.) The California courts traditionally look
to the intention of the parties to determine whether
a joint venture existed. (Holtz v. United Plumbing
& Heating Co. (1957) 49 Cal. 2d 501, 319 P.2d
617, 620; Stilwell v. Trutanich, supra. ) Typically, the
inquiry addresses four factors: (1) “a community of
interest in the subject of the undertaking”; (2) “a
sharing in profits and losses”; (3) an “ ‘equal right’
or a ‘right in some measure’ to control the conduct
of each other and of the enterprise”; and (4) “a
fiduciary relation between or among the parties.” (Jd.
at 288; Goldberg v. Paramount Oil Co. (1956) 143
Cal. App. 2d 215; see Vicioso v. Watson (C.D. Cal.
sili
1971) 325 F. Supp. 1071.) Whether a joint venture
exists rests primarily on the facts of the individual
case. (Nelson v. Abraham (1947) 29 Cal. 2d 745,
750, 177 P.2d 931; Spier v. Lang (1935) 4 Cal.2d
711, 716, 53 P.2d 138; Bank of California v. Connolly
(1973) 36 Cal. App. 3d 350, 364, 111 Cal. Rptr.
468, 478.)
On remand, the court below reexamined the evidence
presented to it to determine whether a joint venture
existed. It properly addressed, among other things, the
control Parvin and the others exercised over the project.
(See id.) By agreement, these investors were entitled
to receive notices concerning the progress of the drilling,
were afforded access to the drilling sites, and were
allowed a voice in deciding whether to drill past the
casing point. However, the court below looked beyond
the written agreement “to all the facts and circumstances
of the situation, including the subsequent conduct of
the parties.” It determined that those decisions most
affecting the ultimate success or failure of the enterprise
were to be made solely by DOC. The court below
also found that the parties themselves never intended
to create a joint venture. Both of these findings are
supported by the record. Accepting these findings
of fact, as we must (Fed. Rules of Civ. Proc. 52),
we are compelled to affirm the court’s determination
that no joint venture existed, that the exemption is
inapplicable, and that DOC should have sought a permit
before selling the securities to Parvin. Parvin properly
asserted his right to rescind the transactions.
II
Under California law, an award of prejudgment inter-
est is governed by California Civil Code §§ 3287 and
3288. Section 3287(a) reads in relevant part: “Every
seein
person who is entitled to recover damages certain,
or capable of being made certain by calculation, and
the right to recover which is vested in him upon a
particular day, is entitled also to recover interest thereon
from that day ... .” Section 3288 provides: “In
an action for the breach of an obligation not arising
from contract, and in every case of oppression, fraud,
or malice, interest may be given, in the discretion
of the jury.” California courts have not always inter-
preted the two statutes consistently. In Nathanson v¥.
Murphy (1957) 147 Cal. App. 2d 462, 305 P.2d
710, the court held that whenever a noncontractual
action arose, the question whether to award prejudg-
ment interest lay in the discretion of the factfinder.
DOC argues that this action to rescind the purchase
of stock for failure to comply with the California Cor-
poration Securities Act is treated as an action for
fraud or for breach of implied warranty. (See also
Pepitone v. Russo (1976) 64 Cal. App. 3d 685, 134
Cal. Rptr. 709.) Because the court below declined
to sward prejudgment interest, DOC argues that we
musi affirm this portion of the judgment.
DOC has not taken into account the more recent
California cases interpreting these statutes to require
the awarding of prejudgment interest whenever the sum
in question is capable of exact determination. In 1964,
the California Supreme Court in interpreting section
3287 emphasized its reluctance to make mandatory
awards of prejudgment interest turn on the form of
the action. (Mass v. Board of Education (1964) 39
Cal. Rptr. 739.) In Tripp v. Swoap (1976) 17 Cal.
3d 671, 552 P.2d 749, 131 Cal. Rptr. 789, the Califor-
nia Supreme Court expressly declined to limit § 3287(a)
to contract actions. Moreover, the California Court
of Appeals discussed the legislative hisiory of §§ 3287
inl
and 3288 at great length less than two years ago
in Levy-Zenter Co. v. Southern Pacific Transportation
Co. (1977) 74 Cal. App. 3d 762, 794-98, 142 Cal.
Rptr. 1, 22-25. It declared that “when sections 3287
and 3288 were adopted in 1872, the key distinguishing
factor was not . . . whether the cause of action arose
in tort or contract, but rather whether the damages
were readily ascertainable.” (Jd. at 795, 142 Cal. Rptr.
at 23.) It held that “prejudgment interest must be
granted as a matter of right if, as a matter of law,
damages are ‘certain, or capable of being made certain
by calculation.’” (/d. at 798, 142 Cal. Rptr. at 25.
(footnote omitted).) Under California law, when the
question of liability is open to dispute, but not the
amount of damages, in the event that liability is found
to exist, damages are considered “certain.” (Esgro Cen-
tral, Inc. v. General Insurance Co. (1971) 20 Cal.
App. 3d 1054, 1060-61, 98 Cal. Rptr. 153, 157; Conti-
nental Bank v. Blethen (1970) 7 Cal. App. 3d 178,
187, 86 Cal. Rptr. 485, 491.)) Under King v. United
Commercial Travelers (1948) 333 U.S. 153, 158, we
are bound by Levy-Zenter unless there is pervasive
evidence that the California Supreme Court would rule
otherwise. Given both Tripp and Mass, we can see
no such pervasive evidence, and DOC offers us none.
We are well aware of the factors that would lead
the lower court to decline to award prejudgment inter-
est were it free to do so. However, California law
requires awards of such interest as a matter of law,
where, as here, the sum is certain.
As we read Mary Pickford Co. v. Bayly Bros. (1939)
12 Cal. 2d 501, prejudgment interest should run from
the time that the right to rescission arose, rather than
the time the lawsuit was filed.
‘otal
Because California law is dispositive, we do not
reach any of the federal questions.
The cause is remanded to the district court to com-
pute interest. In all other respects, the judgment is
affirmed.
a
APPENDIX “B”.
Opinion.
A. B. PARVIN, Plaintiff-A,pellant, v. DAVIS OIL
COMPANY et al., Defendants-Appellees. No. 74-1235.
United States Court of Appeals, Ninth Circuit.
Oct. 20, 1975.
Buyer of fractional interests in oil and gas leases
brought action against seller charging violations of fed-
eral and state securities laws. The United States District
Court for the Central District of California, Robert
J. Kelleher, J., dismissed the action, and the buyer
appealed. The Court of Appeals, Chambers, Circuit
Judge, held that interest sold to buyer constituted se-
curities under federal and California law; that sending
of sales agreement to California and its execution there
by California buyer constituted a sale of a security
in California subject to California securities law; and
that case would be remanded for a determination wheth-
er joint venture exemption and private offering exemp-
tion applied to transaction so as to release seller from
obligation of obtaining a permit.
Reversed and remanded.
Peter M. Appleton (argued), of Tyre & Kamins,
Los Angeles, Cal., for plaintiff-appellant.
Irwin I. Woodland (argued), of Gibson, Dunn &
Crutcher, Los Angeles, Cal., for defendants-appellees.
Before CHAMBERS and HUFSTEDLER, Circuit
Judges, and FITZGERALD,* District Judge.
*Honorable James M. Fitzgerald, United States District Judge
for the District of Alaska, sitting by designation.
a ee
CHAMBERS, Circuit Judge:
Defendant Davis Oil Company (DOC) is a partner-
ship, engaged in the business of gas and oil exploration.
The partnership is composed of Marvin Davis and
his parents, and has its principal place of business
in Denver, Colorado. Plaintiff, Parvin, a California
resident who has substantial experience with investment
in oil and gas properties, first met the Davises in
1960 or 1961 when he purchased some properties
in which they had an interest. After that time he
maintained a periodic social and business relationship
with them.
Involved in this case is Parvin’s participation in
three DOC oil and gas drilling ventures, referred to
as the “Savoie,” “Offset,” and “Wildcat” programs. .
There is some dispute as to the circumstances surround-
ing Parvin’s agreement to be a participant. In late
1967 or early 1968, Parvin-Dohrmann Co., of which
plaintiff was chief executive, was hired to design and
furnish DOC’s new offices and to furnish Marvin
Davis’s home both in Denver. Marvin Davis testified
that while Parvin was in Denver in January and Febru-
ary 1968, the Davises obtained the lease for the Savoie
program and invited Parvin to join them in the project.
According to Mr. Davis, Parvin immediately agreed
to participate. This agreement was not reduced to writ-
ing. Parvin denies that the meeting occurred and says
that he first became interested in investing in DOC
in August 1966 when he met Jack Davis in Los An-
geles. Then, on February 20, 1968, Jack Davis tele-
phoned him and offered him an interest in the Savoie
program. Under either version, Parvin mailed $15,000 -
to DOC in Denver on February 20. Marvin Davis
acknowledged the receipt of plaintiff’s check on Febru-
ary 27.
|
After the Savoie agreement, Jack and Marvin Davis
met with Parvin twice in Los Angeles, but there was
no indication that any significant discussion of Parvin’s
participation in future DOC projects took place at
that time. On July 1, 1968 Jack Davis mailed a letter
to Parvin which mentioned an investment in some
wells in Louisiana and said that further information
would be sent to Parvin if he indicated an interest.
On July 3, 1968, Davis sent Parvin duplicate originals
of a written agreement, signed on behalf of DOC,
selling Parvin an interest in the Offset wells. Parvin
signed the agreement in Los Angeles and sent one
executed copy back to Davis. Letter agreements on
this project were handled in the same manner.
On July 24, 1968, Jack Davis wrote to Parvin
in California offering him an interest in the Wildcat
program and inclosing duplicate originals of a written
agreement signed on behalf of DOC. Parvin wrote
to the Davises questioning some aspects of the program
and a meeting was arranged in Denver for August
3. At that meeting Wildcat was discussed and it appears
that Parvin orally agreed to participate in the program
at that time. On. August 6, 1968, he mailed an executed
copy of the agreement and his check from Los Angeles
to the Davises in Denver.
Plaintiff subsequently brought suit against defendants
for violation of the Securities Act of 1933, the Securities
Exchange Act of 1934, and the California Corporations
Code as it existed prior to January 1969. After trial,
the district court dismissed the action. On appeai, plain-
tiff challenges the findings of the district court that:
(1) the interests in the gas and oil leases involved
in these transactions were not securities under federal
and California law; (2) there were insufficient contacts
with California to render these transactions subject
ial a
to that state’s laws; (3) the registration provisions
of the Securities Act of 1933 did not apply to these
transactions because they were private offerings. Error
is also alleged in the court’s refusal to admit certain
evidence on the issue of the security status of the
interests involved and in the failure of the district
court to find a violation of the Securitiés Exchange
Act of 1934 when defendants did not disclose the
nonregistration of the interests and the failure to obtain
a California permit.
I. Were the Interests Securities?
In order for the federal or state securities law to
apply to these transactions, the interests involved must
have been securities. These interests were fractional
interests in oil and gas leases where the seller of
the interests would conduct oil exploration operations
on the leased land. Both the federal and California
statutes include a fractional interest in an oil or gas
lease within the definition of a security. 15 U.S.C.
§ 77(b)(1); Corporations Code § 25008(a).’ This
circuit has not determined under what circumstances
such a fractional interest is a security under federal
law. Those other circuits which have considered the
issue have held such an interest to be a security when
the seller or a third party will conduct drilling oper-
ations on the land subject to the leases and it is
from these operations that the buyer expects to derive
his profit. Nor-Tex Agencies, Inc. v. Jones, 482 F.2d
1All references to “Corporations Code” refer to the 1949
version of the California Securities Law, Ch. 384, § 1,
[1949], Cal.Stats. 698, as formerly codified at Cal.Corp.Code
§§ 25000-26104 (1955). These sections were replaced with
the Corporate Securities Law of 1968, Cal.Corp.Code §§ 25000-
25804 (Supp. 1975), which became operative on January
2, 1969...
ae
1093 (Sth Cir. 1973); Gilbert v. Nixon, 429 F.2d
348 (10th Cir. 1970).
Further, this court has established a test for determin-
ing when an interest is an investment contract and,
therefore, a security. SEC v. Glen W. Turner Enter-
prises, Inc., 474 F.2d 476 (9th Cir. 1973). An interest
in an enterprise is an investment contract where “the
efforts made by those other than the investor are the
undeniably significant ones, those essential managerial
efforts which effect the success or failure of the enter-
prise.” Applying that test it is clear that the oil interests
sold in this case are investment contracts and therefore
securities under the law of this circuit. While Parvin
and the other investors had some rights with regard
to these operations including the right to decide whether
to continue drilling past the casing point, the major
decisions which would effect success or failure were
made by the Davises. They selected the leases to be
invested in, the sites to be drilled, and made the
decision to commerce drilling at any site. In addition
they directed the drilling and exploration operations.
Under the Turner test it is clear that the degree of
control possessed by Parvin was not adequate to make
the interest other than an investment contract.”
California law appears equally clear. That state’s
courts have continually held that fractional interests
in oil or gas leases coupled with the seller’s obligation
to conduct an exploration or drilling operation are
2In United Housing Foundation v. Forman, 421 U.S. 837,
95 S.Ct. 2051, 44 L.Ed.2d 621, 632 n.15 (1975), the
Supreme Court declined to rule on the propriety of the test
of investment contract adopted by this court in Turner. The
interests involved in this case are securities either as a fractional
oil lease coupled with an exploration operation or as an
investment contract within the meaning of Turner.
os See
securities. Oil Lease Service, Inc. v. Stephenson, 162
Cal.App.2d 100, 327 P.2d 628 (1958). The district
court was in error in holding that the interests sold
were not securities under federal and California law.
II. Should California Law Apply to These Transac-
tions?
The district court held that even if the interests
involved were securities under California law, that the
transactions lacked adequate contact with California
to make an application of that state’s law proper.
This was based on the determination of the district
court that the portions of any of the three transactions
that took place in California were not sufficient to
amount to a sale or issuance of securities in California.
At the time of the transactions involved here, the
California Securities Law provided:
Every security of its own issue sold issued by
any company without a permit of the commissioner
then in effect authorizing the issuance or sale
of the security is void.
Corporations Code § 26100.
The application of this section to sales by out-of-
State issuers to California residents is unclear. Prior
to 1947, the voiding provision applied only to securities
issued in California, not to those sold in California.
Under that wording, the Supreme Court of California
in Robbins v. Pacific Eastern Corp., 8 Cal.2d 241,
65 P.2d 42 (1937), held that the voiding provision
did not apply to a transaction where there were negotia-
tions in California but the actual delivery of the stock
took place in New York. This opinion has been inter-
preted as saying that the former voiding provision
—
would not apply unless there was an actual issuance
or delivery of the stock in California. Loss, The Conflict
of Laws and the Blue Sky Laws, 71 Harv.L.Rev.
209, 230-39 (1957). There has been no California
Supreme Court opinion on the reach of the voiding
provision now that the sale of stock is included in
its terms.
There are two sources which aid in the interpretation
of this provision. First, the California permit require-
ment with attached criminal penalties applied to both
sales and issuance of stock in the state, even prior
to 1947. Corporations Code § 25500. The statute
defines sale for these purposes as including “an offer
to sell; an attempt to sell; a solicitation of a sale;
an option of sale; a contract of sale . . .” Corporations
Code § 25009(a). The decision under this section
deal largely with whether preliminary negotiations or
the giving of information amount to an offer or solicita-
tion of a sale. See e.g., B. C. Turf & Country Club,
Ltd. v. Daugherty, 94 Cal.App.2d 320, 210 P.2d 760
(1949); People v. Rankin, 169 Cal.App.2d 150, 337
P.2d 182 (1959). From these cases, however, it
seems clear that where any statutory element of a
sale takes place in California, its courts have been
willing to apply injunctive relief or criminal penalties
for failure to obtain a permit. The second aid in
our interpretation of the amended voiding provision
is the opinion of the California Court of Appeals
in Hardy v. Musicraft Records, Inc., 93 Cal.App.2d
968, 209 P.2d 839 (1949). In this opinion the court
held void some securities which it found to be both
sold and issued in California. This case was decided
under the unamended “issue” version of the voiding
provision and the court found issuance in the delivery
wa: am
of the securities in California. The court also treated
the issue of whether there was a sale in California
and found that when an agreement was drafted in
New York and then sent to a California resident to
sign and return to New York, there was a sale in
California. Two recent district court opinions have
interpreted the new voiding section in light of the prior
Robbins decision to apply only where there is either
the execution of a sales contract in California or de-
livery in that state. See Robinson v. Cupples Container
Co., 316 F.Supp. 1362 (N.D.Cal.1970) aff'd 513 F.2d
1274 (9th Cir. 1975); Sandor v. Ruffer, Ballan &
Co., 309 F.Supp. 849 (S.D.N.Y. 1970).
Applying these principles to the case before us, we
cannot agree with the district court that California
law should not apply to these transactions. While there
are extensive Colorado contacts here and the parties
did not intentionally seek to evade California law,
there seems to be adequate contacts with California
in this case to mandate application of the permit require-
ment. Here, the second sale of stock was almost identi-
cal to the situation in Hardy. The agreement was
drafted without a prior meeting in Denver, and then
sent to Parvin who signed it and returned it to
Denver. The sending of this agreement into California,
its signing there by Parvin, and its return constitute
a sale of securities in California. The third transaction
is similar to the second except that before Parvin signed
the agreement in California there was a meeting between
the parties in Denver. Even if all of the terms of
the agreement were settled upon orally in Denver,
the prior sending of the agreement to Parvin and
his subsequent signing of it in California constitute
a sale of securities in California. The first transaction
eh ene
—_
presents the most difficult question. There was an oral
agreement between the parties in Denver and no written
agreement was executed. As the purpose of the Califor-
nia Securities Law is to protect investor-residents, we
consider that the payment by Parvin in the form of
a check mailed from California, constituted a sale
of securities in California so as to apply the voiding
provision. The extent of the transactions contacts with
Colorado is irrelevant. The question is not one of
which jurisdiction’s law ought to apply based on the
greatest number of contacts, but rather whether the
appellees by their actions brought themselves within
the scope of the California Securities Law. We find
that they did.
Ill. Do the California Joint Venture Exemption and
the Federal Private Offering Exemption Apply
to these Transactions?
Since we have found that the interests involved were
securities under federal and California law and that
the transactions were sales within California, the ques-
tion remains whether any exemptions apply to render
the state permit requirement or the federal registration
requirement inapplicable.
Corporations Code § 25100 exempts from the permit
requirement securities which are bona fide joint venture
interests and which are not offered for sale to the
public. The district court held that the interests in
this case were not securities and it specifically did
not reach the issue of whether a joint venture exemption
would apply. While the district court did make com-
ments on the joint venture issue, it did not make
findings on the relevant factual issues or make a ruling
on the application of this exemption. Because we have
i” euke dan ee
a es
held these interests to be securities, their exempt status
is relevant to a final determination of this case. There-
fore, on remand the district court should consider wheth-
er these securities qualify for a joint venture exemption.
The district court found that the private offering
exemption applied to the transactions in this case and
therefore the Securities Act of 1933 did not require
their registration. The Supreme Court in SEC v. Ralston
Purina Co., 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed.
1494 (1953), set out the requirements of the private
offering exemption. A private offering is one where
the investors do not need the protection of the Act
because they already have access to the kind of infor-
mation that would be contained in a registration state-
ment. Investor sophistication alone is inadequate, there
must also be demonstrated the requisite access to infor-
mation. Borton & Rifkin, Private Placement and Pro-
posed Rule 145, 25 Hastings L.J. 287, 295-303 (1974).
While the district court found in this case that Parvin
was a previous investor in gas and oil properties and
that by the terms of the agreements he had access
to some information, the findings of the court do not
indicate whether Parvin had full access to the sort
of information that would have appeared in the regis-
tration statement. Absent a determination of this issue,
there can be no ruling on whether the private offering
exemption applies. On remand the district court should
make more specific findings as to what information
Parvin had as an experienced investor and what informa-
tion he could obtain under the terms of the agreement.
—j19—
Appellants argue that the district court erred in failing
to find that the nondisclosure of the lack of a permit
and nonregistration of the securities violated the Se-
curities Exchange Act of 1934. Since we have made
no determination as to whether registration or a permit
are required, any ruling on this alleged violation would
be premature.
Reversed and remanded for proceedings consistent
with this opinion.
~ =
APPENDIX “C”.
Judgment.
United States District Court, Central District of Cali-
fornia.
A. B. PARVIN, Plaintiff, v. DAVIS OIL COM-
PANY, a partnership, JACK DAVIS, MARVIN DA-
VIS, PAUL MESSINGER, Defendants. Case No. 70-
1529 RJK.
Filed: Jan. 11, 1977.
This action came on for trial before the Court,
Honorable Robert J. Kelleher, District Judge, presiding,
and the issues having been duly tried and decisions
having been duly rendered in accordance with Memo-
randa of Decisior filed October 24, 1973 and June
16, 1976 and the Court having made and filed its
Findings of Fact and Conclusions of Law it is hereby:
1. ORDERED, ADJUDGED, and DECREED that
plaintiff have judgment against defendants Davis Oil
Company, Jack Davis, and Marvin Davis, jointly and
severally, in the sum of $213,905.15, together with
his costs of suit in the amount of .... .............
2. IT IS FURTHER ORDERED, ADJUDGED,
and DECREED, that upon satisfaction of paragraph
1 of this Judgment all interest of plaintiff in the leases
described in this Court’s Memorandum of Decision
filed October 24, 1973 and division orders issued to
plaintiff in connection therewith are vested in defendant
Davis Oil Company.
3. IT IS FURTHER ORDERED, ADJUDGED
and DECREED that upon satisfaction of paragraph
1 of this Judgment plaintiff shall deliver to defendant
Davis Oil Company, at the offices of its attorneys,
=
Gibson, Dunn & Crutcher, the following checks fully
endorsed, which were received by plaintiff but never
cashed.
Dated Amount
November 25, 1969 $ 98.52
February 9, 1970 1,116.09
February 26, 1970 80.06
March 23, 1970 447.52
April 24, 1970 733.43
May 25, 1970 585.69
June 24, 1970 394.61
June 24, 1970 236.85
August 24, 1970 79.67
September 22, 1970 277.86
December 24, 1970 133.01
January 25, 1971 86.97
February 23, 1971 86.90
April 27, 1971 103.09
October 24, 1971 60.96
Dated at Los Angeles, California this 31 day of
December, 1976.
ROBERT J. KELLEHER
UNITED STATES DISTRICT JUDGE
Approved as to form: GIBSON, DUNN & CRUTCH-
ER, IRWIN F. WOODLAND, J. EDD STEPP, JR.,
RICHARD CHERNICK.
By J. Edd Stepp, Jr., Counsel for Defendants.
Presented by: TYRE & KAMINS, PETER M. AP-
PLETON.
By /s/ Peter M. Appleton, Peter M. Appleton,
Counsel for Plaintiff.
—
Findings of Fact and Conclusions of Law.
United States District Court, Central District of Cali-
fornia.
A. B. PARVIN, Plaintiff, v. DAVIS OIL COM-
PANY, a partnership, JACK DAVIS, MARVIN DA-
VIS, PAUL MESSINGER, Defendants. CASE NO.
70-1529-RJK.
Filed: Jan. 11, 1977.
This action, having been tried upon the facts by
the Court without a jury, the Court does hereby find
the facts and states separately its Conclusions of Law
thereon and directs the entry of the appropriate judg-
ment as follows:
FINDINGS OF FACT
1. The Court’s Memorandum of Decision filed on
October 24, 1973 as modified and addended by the
Court’s Memorandum of Decision filed June 16, 1976
and as addended hereby shall be deemed the Court’s
Findings of Fact. The Court’s memoranda filed on
October 24, 1973 and June 16, 1976 are hereby incor-
porated herein by this reference.
2. As damages, plaintiff is entitled to return of
the monies which he paid to defendants in these trans-
actions less what he received. That amount is $213,-
905.15.
3. The Court, in the exercise of its discretion, finds
that plaintiff should not be awarded any prejudgment
interest.
CONCLUSIONS OF LAW
1. The Court’s Memorandum of Decision filed on
October 24, 1973 as modified and addended by the
Court’s Memorandum of Decision filed June 16, 1975
and as addended hereby shall be deemed the Court’s
Conclusions of Law. The Court’s memoranda filed on
—
October 24, 1973 and June 16, 1976 are hereby incor-
porated herein by this reference.
2. An award of prejudgment interest in a case
such as this involving violations of the Federal Securities
Laws rests within the equitable discretion of this Court.
3. Under California Law plaintiff is not entitled
to prejudgment interest as a matter of right. An award
of prejudgment interest in a case such as this wherein
a plaintiff recovers monies which he paid for securities
issued without a permit in violation of Section 25100
of the 1949 version of the California Corporate Securi-
ties Law, Ch. 384, § 1 [1949], Cal. State 698, as
formerly codified at Cal. Corp. Code § 25000-26104
(1955), rests within the discretion of the Court.
4. The Court, in the exercise of its discretion, con-
cludes that plaintiff should not be awarded any prejudg-
ment interest on either his California or Federal Securi-
ties Law claim.
5. Plaintiff is entitled to $213,905.15 in damages
under Section 25100 of the 1949 version of the Cali-
fornia Corporate Securities Law and under 15 U.S.C.
Section 78aa.
6. Plaintiff is entitled to recover his costs of suit.
Let judgment be entered accordingly.
Dated: December ........ , 1976.
United States District Judge
Approved as to form: Gibson, Dunn & Crutcher,
Irwin F. Woodland, J. Edd Stepp, Jr., Richard Cher-
nick.
By J. Edd Stepp, Jr., Counsel for Defendants. /
Presented by: Tyre & Kamins, Peter M. Appleton.
By /s/ Peter M. Appleton, Peter M. Appleton,
Counsel for Plaintiff.
= =
Memorandum of Decision.
United States District Court, Central District of Cali-
fornia.
A. B. Parvin, Plaintiff, v. Davis Oil Company, a
partnership, Jack Davis, Marvin Davis and Paul Mes-
singer, Defendants. No. 70-1529-RJK.
Filed: June 16, 1976.
This suit, currently on remand from the Ninth Circuit
Court of Appeals, began as an action by plaintiff
against the defendant oil company for damages concern-
ing certain investment contracts. Plaintiff claims these
transactions to be in violation of both the California
and federal securities laws. This court, sitting without
a jury, dismissed the action, finding that: (1) the
oil and gas lease interests purchased by the plaintiff
were not securities under either California or federal
law; (2) the transactions involved insufficient contacts
with California to afford the protections of that state’s
laws; and (3) the transactions were private offerings
and hence exempt from the registration requirements
of the Securities Act of 1933. Plaintiff appealed all
three rulings.
The Court of Appeals reversed on each of these
grounds and remanded for further proceedings on the
exemptions issue. First, the Court found these invest-
ment contracts to be securities under both federal and
California law. Specifically, the Court held these con-
tracts qualified as securities under the federal test estab-
lished in Securities and Exchange Commission v. Glen
W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir.
1973), being transactions “where ‘the efforts made
by those other than the investor are the undeniably
significant ones, those essential managerial efforts which
—
effect the success or failure of the enterprise.’” (Par-
vin v. Davis Oil Company, 524 F.2d 112, 115-116
(1975)). The Court also found California law viewed
these transactions as securities, being contracts which
afforded the investor “fractional interests in oil or
gas leases coupled with the seller’s obligation to conduct
an exploration or drilling operation . . . .” Parvin
v. Davis Oil Company, supra.
Second, the Court of Appeals found the actions
which the plaintiff took, while in California, to finalize
these investment contracts were sufficient to establish
the sales as having taken place in that state, and,
thus, as being subject to its laws.
Third, the Court found the investor sophistication
test used by this court in determining that these transac-
tions qualified for the private offering exemption from
the registration requirement of the Securities Act of
1933 was insufficient as it did not determine whether
or not the investor actually had access to the sort
of information which would have been contained in
a registration statement. The case was thus remanded
for determination of both this issue, and that of whether
or not these transactions qualified for the joint venture
exemption under the California permit requirement,
the latter an issue not reached by this court. Parvin
v. Davis Oil Company, 524 F.2d 112, 118 (1975).
As this action was tried without a jury, and, further,
as each party was afforded a full opportunity at trial
to present all relevant evidence, no further proceedings
need be held in order to comply with the mandate
of the Court of Appeals for more specific findings. .
Irish v. United States, 225 F.2d 3, 8 (9th Cir. 1955).
Nor is there a need to hear the evidence already
given a second time. /ngraham vy. Wright, 498 F.2d
—26—
248, 265 (Sth Cir. 1974); Gulbenkian v. Gulbenkian,
147 F.2d 173, 177 (2nd Cir. 1945). Accordingly,
this court will proceed to make its determination.
_ The court finds as follows: (1) that these transactions
fail to qualify for the joint venture exemption from
the California Corporate Securities Law permit require-
ment; (2) that these transactions also fail to qualify
for the private offering exemption from the registration
requirement of the Securities Act of 1933; (3) that
the defendants’ failure to inform the plaintiff that the
securities were not registered under either California
or federai law constitutes a violation of §10(b) of
the Securities and Exchange Act of 1934; and, thus,
(4) that the plaintiff is entitled to the relief he seeks.
I. The California Joint Venture Exemption
This action arose under the old California Corporate
Securities Law (California Corporation Code §§25000
et seq. [West 1954]), adopted in 1949, and amended
as of January 2, 1969. Section 25100 of that law'
demands that an issuer obtain a permit before selling
any security. The defendants obtained no such permit;
they claim that none was required as these transctions
fall within the joint venture exemption from that re-
quirement.
A joint venture is defined as “an undertaking by
two or more persons jointly to carry out a single
enterprise for profit.” Stillwell v. Trutanich, 178 Cal.
App. 2d 614 (2 Dist. 1960); Vicioso v. Watson,
4Section 25100 reads as follows:
Except as otherwise expressly provided in this division,
the Curporate Securities Law does not apply to any of
the following classes of securities: . . . (m) Any Bes
fide joint adventure interest, except such interests when
offered to the public.
—
325 F.Supp. 1071, 1075 (C.D. Cal. 1971). California
law has required four elements be present in order
for a joint venture to be found, these being: “(1)
a community of interest among the parties, (2) a
share in profits and losses, (3) a close and fiduciary
relationship between the parties, and (4) a right to
control possessed by each party.” Vicioso v. Watson,
supra; Stillwell v. Trutanich, supra at 288; Goldberg
v. Paramount Oil Company, 143 Cal. App. 2d 215
(2 Dist. 1956).
By far the most important of these elements to
the finding of a joint venture is the right to control.
Bank of California v. Connolly, 36 Cal. App. 3d
350 (4 Dist. 1974). A joint venture can be found
to exist where the parties have unequally exercised
their right of control, as where certain functions have
been delegated to certain of the parties (Stillwell v.
Trutanich, supra); however, the essential inquiry con-
cerns whether or not the right itself exists. Bank of
California v. Connolly, supra; Vicioso v. Watson, supra.
“Absent such right, the mere fact that one party is
to receive benefits in consideration . . . for capital
contribution does not, as a matter of law, make him
a partner or a joint venturer.” Bank of California
v. Connolly, supra, at 364.
The question of whether or not a joint venture
exists must finally became a matter of “determining
the intention of the parties.” Holtz v. United Plumbing
and Heating Company, 49 Cal. 2d 501, 319 P.2d
617, 620 (1957). The court finds there was no such
intent present here.
An initial indication of these parties’ intent is found
in the Operating Agreement itself. Paragraph 21 of
this document states:
iis
The liability of the parties shall be several, not
joint or collective ... . It is not the intention
of the parties to create, nor shall this agreement
be construed as creating a mining or other part-
nership or association, or to render them liable
as partners.
As the incidents of partnership and of joint venture
are essentially identical (Bank of California v. Con-
nolly, supra, at 364), and as the “[r]ights and liabilities
of joint venturers, as between themselves, are governed
by the same principles which apply to a partnership”
(Bank of California v. Connolly, supra, at 371), such
a statement negates any inference from this agreement
itself of an intent to form a joint venture.
Of course, the court is not limited in its inquiry
to written agreements, but may look to all the facts
and circumstances of the situation, including the subse-
quent conduct of the parties. Connor v. Great Western
Savings and Loan Association, 69 Cal. 2d 850, 73
Cal. Rptr. 369, 447 P.2d 609 (1969); Rickless v.
Temple, 4 Cal. App. 3d 869 (2 Dist. 1970). However,
all such circumstances here fail to establish an intent
to create a joint venture. As the Court of Appeals
recognized, the investors here had but a minimal right
of control, sufficient neither in name nor in exercise
for the finding of a joint venture. By agreement, these
investors were entitled to receive notices concerning
the progress of the drilling, were afforded simple access
to the drilling sites, and were allowed a voice in decid-
ing whether or not to drill past the casing point. How-
ever, the major decisions—those most affecting the
ultimate success or failure of the enterprise—were to
be made solely by the defendants.
a
Thus, as he had an insufficient right of control
over the essentials of the drilling operations involved
here, the plaintiff was not, as a matter of law, a
joint venturer, and, thus, these transactions do not
qualify for the joint venture exemption from the permit
requirement of the California Corporate Securities Law.
II. The Federal Private Offering Exemption
Under the Securities Act of 1933 (15 U.S.C. §77
e), there must first be a registration statement in
effect with regard to a security before it may be sold
through or carried in interstate commerce or the mails.
This registration requirement does not apply, however,
to “transactions by an issuer not involving any public
offering.” 15 U.S.C. §77d(2). It is this exemption
which the defendants here claim.
In Securities and Exchange Commission y. Ralston
Purina Company, 346 U.S. 119 (1953), the Supreme
Court set forth guidelines for determining when an
offering of securities is indeed a private one. In so
doing, the court focused upon the intent of the 1933
Act, noting that the “design of the statute is to protect
investors by promoting full disclosure of information
"Section 5 of the 1933 Act (15 U.S.C. §77e) reads, in
pertinent part:
(a) Unless a registration statement is in effect as to
a security, it shall be unlawful for any person, directly
or indirectly—
(1) to make use of any means or instruments of
transportation or communication in interstate
commerce or of the mails to sell such security
through the use or medium of any prospectus
or otherwise; or
(2) to carry or cause to be carried through the
mails or in interstate commerce, by any means
or instruments of transportation, any such se-
curity for the purpose of sale or for delivery
after sale.
a
thought necessary to informed investment decisions.”
Securities and Exchange Commission v. Ralston Purina
Company, supra, at 124. Thus, the Court stated that:
. the applicability of [the private offering
exemption] should turn on whether the particular
class of pérsons affected need the protection of
the Act. An offering to those who are shown
to be able to fend for themselves is a transac-
tion “not involving any public offering.” Securities
and Exchange Commission v. Ralston Purina Com-
pany, supra, at 125.
A prima facie case for the alleged violation of the
registration requirement of the 1933 Act must set
forth that “(1) no registration statement was in effect
as to the securities, (2) the defendant sold or offered
to sell these securities, and (3) interstate transportation
or communication and the mails were used in connection
with the sale or offer of sale.” Securities and Exchange
Commission v. Continental Tobacco Company of South
Carolina, Inc., 463 F.2d 137, 155 (Sth Cir. 1972).
This much the plaintiff has established; the burden
is thus upon the defendant to prove these transactions
qualify for the private offering exemption. Securities
and Exchange Commission v. Sunbeam Gold Mining
Company, 95 F.2d 699, 701 (9th Cir. 1938).
At trial, testimony was offered as to the information
actually afforded the plaintiff both before and during
his relationship with the oil company. Before investing,
the plaintiff was given an opportunity to discuss with
the defendants such particulars as the site maps, the
engineering and geological reports, and the overall pros-
pects of the intended drillings. During the actual opera-
tions themselves, the plaintiff was kept informed con-
cerning the day-to-day progress of the drilling. No evi-
dl un
dence was offered, however, which established that
the plaintiff had access to the kind of information
which would have been available to him had a regis-
tration statement been properly filed by the oil com-
pany.* There was a failure to afford to plaintiff the
following: (1) information concerning the company’s
capital assets; (2) the costs of the offering; (3) the
intended use of the proceeds of the offering; (4) the
company’s other offerings; (5) the company’s overall
assets and debts; (6) the company’s profit and loss
statements for several previous years; and (7) copies
of and information concerning every material contract
made between the company and any other party.
Thus, the defendants have failed to sustain their
burden of proof. Accordingly, this court finds the de-
fendants’ transactions to have been in violation of §5
of the Securities Act of 1933.
Ill. The Securities and Exchange Act of 1934
Plaintiff cannot predicate his claim for relief simply
upon the defendants’ violation of §5 of the 1933 Act,
for that Act’s statute of limitations has already run
(15 U.S.C. §77m). However, relief may be afforded
under the Securities and Exchange Act of 1934.
The wrongful concealment of the fact that a security
is not registered pursuant to the requirement of the
8The information required to be included in a registration
statement is set out in 15 U.S.C. §77aa. Briefly stated, other
than the information already mentioned, such a statement must
include detailed information concerning:
(1) the issuer’s identity; (2) the identity of the issuer’s
executive personnel and of its promoters; (3) the identity
of, and copies of any agreements with, the issuer’s under-
writers; (4) the character of the issuer’s business; and
(5) the prices of the securities. Some further information
is required for the registration of oil and gas interests
or rights by the S.E.C.’s Form S-10.
mee ee
Securities Act of 1933 has been held to be a material
omission in violation of Rule 10b-5 (17 C.F.R. §240.10
b-5), and thus actionable under the 1934 Act with
its different limitations period. Katz v. Amos Treat
Company, 411 F.2d 1046, 1055 (2nd Cir. 1969);
Osbourne v. Mallory, 86 F.Supp. 869, 879. See also
Rotstein v. Reynolds and Company, 359 F.Supp. 109,
112 (N.D. Ill. 1973). As the 1934 Act does not
provide any particular limitation period within which
10b-5 actions must be brought, the court must look
to the period provided by the forum. Osbourne v.
Mallory, supra. California law’ provides a “three-year
statute of limitations, which begins to run when a
plaintiff knows or should have known of the fraud.”
Nichols v. Canoga Electronics Corp., No. 74-1808 (9th
Cir. February 11, 1976). As the series of transactions
between plaintiff and defendants concerned here began
in 1968, and as the plaintiff filed suit in July of
1970, the plaintiff's action is timely with respect to
the 1934 Act.
From the foregoing, it appears, and the court finds,
that on the liability issue the plaintiff must prevail.
On the issue of damages, which was not reached at
4Cal.Civ.Proc.Code §388(4) (West 1954); Cal.Civ.Code §19
(West 1954).
Cal.Civ.Proc.Code §338(4) read, in pertinent part:
Within three years: .. .
4. An action for relief on the ground of fraud or mistake.
The cause of action in such case not be deemed
to have accrued until the discovery, by the aggrieved
party, of the facts constituting the fraud or mistake.
Cal.Civ.Code §19 reads, in pertinent part:
Every person who has actual notice of circumstances
sufficient to put a prudent man upon inquiry as to a
, particular fact, has constructive notice of the fact itself
in all cases in which, by prosecuting such inquiry, he
might have learned such fact.
ne ne a ate ne ase ee
cine
the trial, the parties are ordered to proceed in accord-
ance with the Federal Rules of Civil Procedure and
the Rules of this Court to prepare, serve and file
appropriate Memoranda of Contentions of Fact and
Law and a Proposed Pretrial Conference Order. Pretrial
Conference is set for August 2, 1976, at 10:00 a.m.
The Clerk is ordered to serve by mail on the attorneys
for the parties a copy of this Memorandum of Decision.
DATED: June 16, 1976.
Robert J. Kelleher
United States District Judge
_— =
Memorandum of Decision.
In the United States District Court for the Central
District of California.
A. B. Parvin, Plaintiff, v. Davis Oil Company, a
partnership, Jack Davis, Marvin Davis and Paul Mes-
singer, Defendants. Civil No. 70-1529-RJK.
Filed: Oct. 24, 1973.
Pursuant to the stipulation of the parties, and as
set forth in the second amended pre-trial conference
order, this case proceeded to trial bifurcated into two
parts (hereinafter referied to as Trial “A” and Trial
“B”). After receipt of evidence, oral and documentary,
and after hearing argument of counsel, the Court or-
dered the matter submitted as to the issues tendered
on Triai “A”.
This action was brought by the plaintiff, A. B.
Parvin, against Davis Oil Company (a partnerhsip com-
posed of Jack Davis, Marvin Davis and Jean Davis)
and against Jack Davis, Marvin Davis and Paul Mes-
singer, seeking to recover damages from defendants
arising from the alleged offer in sale by defendants
to plaintiff of fractional interests in three oil and gas
drilling programs, consisting of nine separate explora-
tory oil and gas wells, and underlying leases, the plain-
tiff contending that each of the transactions constituted
an offer in sale of securities allegedly in violation
of section 12 of the Securities Act of 1933 as amended
(15 U.S.C. § 77(1)0, section 10(b) of the Securities
and Exchange Act of 1934, as amended (15 U.S.C.
§ 78J(b)), Rule 10b-5, enacted under the Securities
and Exchange Act of 1934 (17 C.F.R. § 240.10b-
5), and the California Corporate Securities Law as
it existed prior to January 1, 1969, being sections
iat
a
25000, et seqg., and more particularly sections 25500,
26100 and 26104.
Defendants contend that the interests purchased by
the plaintiff did not constitute securities under any
of the foregoing State or Federal statutes.
Jurisdiction is asserted under the applicable sections
of the Federal Securities Act and with respect to the
claim of violation of the Calfornia Corporations Code,
diversity of citizenship and the appropriate jurisdictional
amount is claimed.
Most of the facts are admitted as follows:
1. Jack Davis, Marvin Davis, and Paul Messinger
were at all times herein mentioned and are now residents
of Denver, Colorado. A. B. Parvin was at all times
herein mentioned and is now a resident of Beverly
Hills, California.
2. Davis Oil Company was at all times herein
mentioned and is now a partnerhsip composed of Jack
Davis, Marvin Davis, and Jean Davis, with its principal
place of business in Denver, Colorado.
3. On or about February 6, 1968, Wilmer I. Pool,
as assignor, assigned to Davis Oil Company, as assignee,
assignor’s interest in two mineral leases covering the
real estate described in said assignment and located
in LaFourche Parish, Louisiana. On or about March
12, 1968, Pan American Petroleum Corporation as
sublessor, and Davis Oil Company, as sublessee, entered
into a sublease of the working interest in the oil,
gas, and mineral leases described in said sublease and
located in LaFourche Parish, Louisiana. Said assign-
ment and sublease or the exploratory oil and gas well
drilled thereon are herein described as “C. E. Savoie
Unit No. 1” or “Savoie.”
—
4. On or about February 16, 1968, Perrin-Marsh-
land, a joint venture, entered into a written agreement
with Davis Oil Company under the terms of which
Perrin-Marshland acquired 30% of Davis Oil Com-
pany’s interest in the Savoie program. On or about
February 23, 1968, Mortimer M. Caplin and Davis
Oil Company entered into a written agreement under
the terms of which Caplin acquired 124% of Davis
Oil Company’s interest in Savoie. On or about March
1, 1968, Julius Livingston and Davis Oil Company
entered into a written agreement under the terms of
which Livingston acquired 1242% of Davis Oil Com-
pany’s interest in Savoie. Plaintiff A. B. Parvin acquired
a 1/8% (12%%) interest in Savoie or $15,000
on or about February 27, 1968. No written agreement
was executed between Mr. Parvin and Davis Oil Com-
pany with respect to the purchase of this interest.
5. Drilling of the Savoie test well commenced. on
or about March 1, 1968. The well was not commercially
successful and none of the participants received any
income from his interest in Savoie. The underlying
oil, gas and mineral leases have, by their terms, expired.
6. The Offset program consisted of the following
four exploratory oil and gas well prospects: (a) North
La Rose Prospect (P. G. Lake No. 1); (b) North
Veltin Field Prospect (N. A. Pellerin No. 1); (c)
Avondale Prospect (S. D. G. Robicheaux No. 1);
and (d) East Bayou Henry Prospect (Sohio-Wilbert
No. 1). Said exploratory oil and gas well prospects,
the underlying oil, gas and mineral leases or the explora-
tory oil and gas wells drilled thereon are herein de-
scribed collectively as “Offset Program.”
7. On or about January 22, 1968, William R.
Bullen, Jr., as lessor, and Davis Oil Company, as
aed a
he bine
~~
lessee, entered into an oil, gas, and mineral lease cover-
ing the real estate described in said lease and located in
LaFourche Parish, Louisiana. Said lease or the explora-
tory oil and gas well drilled thereon are herein described
as “P. G. Lake No. 1” or “Lake.”
8. On or about July 20, 1968, Frederick Lionel
Maryer, attorney in fact for lessor, and Davis Oil
Company, as lessee, entered into a gas and mineral
lease covering the real estate described in said lease
and located in St. Landry Parish, Louisiana. Said lease
or the exploratory oil and gas well drilled thereon
are herein described as “N. A. Pellerin No. 1” or
“Pellerin.”
9. On or about July 1, 1968, Mrs. Sara Day
Gibbens Robicheaux and eighteen other persons, as
lessors, and Vincent R. Perrin, Jr., as lessee, entered
into an oil, gas, and mineral lease covering the real
estate described in said lease and located in Jefferson
Parish, Louisiana. On or about July 3, 1968, Vincent
R. Perrin, Jr., and Davis Oil Company, entered into
a written agreement under the terms of which Perrin
agreed to assign to Davis Oil Company a three-fourths
interest in the oil, gas, and mineral lease between
Perrin and Robicheaux, et al., on the conditions de-
scribed in said agreement. Said lease agreement and
the exploratory oil and gas well drilled thereon are
herein described as “S.D.G. Robicheaux No. 1” or
“Robicheaux.”
10. On or about December 12, 1967, Mable Helen
Cassidy Tieman,. Executrix of the estate of Helen Wil-
bert Cassidy, as lessor, and Davis Oil Company, as
lessee, entered into an oil and gas lease covering the
real estate described in said lease, and located in Iber-
ville Parish, Louisiana. On or about December 12,
ea Ne
1967, A. Wilbert Sons Lumber and Shingle Company, a
Louisiana corporation, and twenty-seven others, as
lessors, and Davis Oil Company, as lessee, entered
into an oil and gas lease covering the real estate
described in said lease and located in Iberville Parish,
Louisiana. Said lease or the exploratory oil and gas
wells drilled thereon are herein described as “Sohio-
Wilbert No. 1” or “Sohio-Wilbert.”
11. On or about June 25, 1968, Davis Oil Company
entered into written agreements with the following
named persons under the terms of which said persons
acquired portions of Davis Oil Company’s interest in
the Offset program as follows:
Mortimer M. Caplin 12.5%
Harold Toppel 11.25%
Manuel Vallecillo 1.25%
Salvatore Coletta 1.25%
Sergio Camero 1.25%
Edwin Epstein 2.5%
David Epstein 2.5%
George Toppel 2.5%
Milton Toppel 2.5%
On or about July 22, 1968, David L. Kreeger and
Marvin Willig each entered into a written agreement
with Davis Oil Company, under the terms of which
Kreeger and Willig each acquired 3.25% of Davis
Oil Company’s interest in the Offset program. On or
about August 5, 1968, Robert L. Heymann and Davis
Oil Company entered into a written agreement under
the terms of which Heymann acquired 1.5626% of
Davis Oil Company’s interest in the Offset program.
12. On or about September 4, 1968, Blaez, “td.,
a limited partnership, entered into a written agreement
with Davis Oil Company under the terms of which
“ i Bonde sive Rbabl Statin eased
ilies
Blaez, Ltd., acquired 1242% of Davis Oil Company’s
interest in the Sohio-Wilbert.
13. The parties have stipulated that with the excep-
tion of the names of the parties, the percentages of
their interests, the amounts of their payments and the
well prospects included, the terms of the agreements
between Davis Oil Company and each working interest
owner are the same.
14. Subsequent to plaintiff's investment in the C. E.
Savoie, the parties discussed plaintiffs participation
in further drilling programs. Following these discussions,
on or about July 1, 1968, Jack Davis, acting on
behalf of Davis Oil Company, at Denver, Colorado,
mailed to plaintiff A. B. Parvin, at Los Angeles, Cali-
fornia, a letter dated July 1, 1968, which read as
follows:
“Deal Al:
“Many, many thanks for your kindness on our
recent visit with Marvin and Jean. I really wanted
to discuss some things with you about a well,
but there was no time as you seemed to be in
a rush and a hurry and I did not want to disturb
[sic] you.
“I am really determined to get you some very
good oil reserves if I can. At this particular time
we have four direct offset wells to drill in Louisi-
ana, all have exceptionally large reserves. These
wells are deep and very expensive, but we can
put you in some of these if you so desire. If
you are interested I will send you all the maps
and reserve figures.
“We are going to commence these wells in July
and if you can give me a quick answer I can
—
elucidate you further if you are interested. You
can call me here at the office and I can proceed
immediately with information to you if you are
so inclined.
“These deals we usually keep for ourselves, but
Marvin and I feel we want to get you some
oil and believe this is an opportunity with driect
offset wells. These are. development fields. They
will run approximately 12,000 feet and a 1/16th
interest would be between $14,000.00 and $15,-
000.00.
“Al, you would not have to go, but these wells
really are minimum risk prospects. Would you
please let me know if you are interested as soon
as you can.
Very truly yours,
Jack Davis”
Said letter was received by Mr. Parvin in the oridnary
course of the United States mails. On or about July
3, 1968, Paul Messinger, as authorized agent for Davis
Oil Company, at Denver, Colorado, caused a written
agreement to be prepared and signed in duplicate on
behalf of Davis Oil Company. On or about July 3,
1968, Jack Davis, acting on behalf of Davis Oil Com-
pany, at Denver, Colorado, mailed to plaintiff A. B.
Parvin, at Los Angeles, California, a letter dated July
3, 1968, and the said written agreement. The letter
read as follows:
“Dear AI:
“Enclosed are the Agreements on the four offset
wells which we are commencing to drill in the
very near future in the State of Louisiana. If
all are successful, the monthly income and reserves
could be very substantial. I could get our engineers
pared
a a
to draw up the potential in each case, if you
so desire.
“I am not enclosing a geological map, but only
a plat of the acreage. They are all adjacent to
very large oi! and gas fields and are the equivalent
of development wells.
“I hope this brings good luck and will accomplish
what I am trying for you inasmuch as these
are not wildcats.
“I am leaving for New York and Washington
this coming Monday and will return to Denver
on Thursday evening. Let me know if you would
like more information.
“With regards from Jean and Marvin,
Sincerely,
Jack Davis”
Said letter and written agreement were received by
Mr. Parvin in the ordinary course of the United States
mails. Duplicate originals of both the “written agree-
ment” and “operating agreement” (the operating agree-
ment is Exhibit “B” to the written agreement) were
signed on behalf of Davis Oil Company, a partnership,
by Paul Messinger, its attorney in fact, when Mr.
Parvin received them in the mail. Mr. Parvin signed
the written agreement and put one fully executed copy
in his file, and returned by mail the other to Davis
Oil Company at Denver, Colorado.
15. On or about July 24, 1968, Paul Messinger,
as authorized agent for Davis Oil Company at Denver,
Colorado, caused a letter agreement to be prepared
and signed in duplicate on behalf of Davis Oil Com-
pany. On or about July 24, 1968, Jack Davis, acting
on behalf of Davis Oil Company, at Denver, Colorado,
mailed to plaintiff, A. B. Parvin, at Los Angeles,
sila
California, the letter and the letter agreement. Said
letter and letter agreement were received by Mr. Parvin
in the ordinary course of the mails. The duplicate
originals of the letter agreement were signed on behalf
of Davis Oil Company, a partnership, by Paul Mes-
singer, its attorney in fact, when Mr. Parvin received
them in the mail. Mr. Parvin signed the letter agree-
ment, put one fully executed copy in his file, and
mailed the other back to Davis Oil Company at Denver,
Colorado; it covered plaintiff's interest in the Offset
program.
16. The following constitutes a recap of the working
interest ownership in the Offset program as a result
of the transactions described in paragraphs 11, 12,
14 and 15:
Lake, Pellerin and Robicheaux—Working interest as
follows:
Mr. Harold Toppel 11.2500
Mr. George Toppel 2.5000
Mr. Milton Toppel 2.5000
Mr. Manuel Vallecillo 1.2500
Mr. Sergio Camero 1.2500
Mr. Edwin Epstein 2.5000
Mr. David Epstein 2.5000
Mr. Salvatore Coletta 1.2500
Mr. Mortimer Caplin 12.5000
Mr. David Kreeger 3.1250
Mr. Marvin Willig 3.1250
Mr. A. B. Parvin 7.8125
Mr. Robert L. Heymann 1.5625
DAVIS OIL COMPANY 46.8750
: Total 100.0000%
—43—
Sohio-W ilbert—W orking Interest as follows:
Mr. Haroid Toppel 11.2500
Mr. George Toppel 2.5000
Mr. Milton Toppel 2.5000
Mr. Manuel Vallecillo 1.2500
Mr. Sergio Camero 1.2500
Mr. Edwin Epstein 2.5000
Mr. David Epstein 2.5000
Mr. Salvatore Coletta 1.2500
Mr. Mortimer Caplin 12.5000
Mr. David Kreeger 3.1250
Mr. Marvin Willig 3.1250
Mr. A. B. Parvin 7.8125
Mr. Robert L. Heymann 1.5625
Blaez, Ltd. 12.5000
DAVIS OIL COMPANY 34.3740
Total 100.0000%
17. Mr. Parvin paid Davis Oil Company the
amounts required of him for his participation in the
Offset program as follows: July 8, 1968—$56,000.00,
and August 5, 1968—$14,000.00. -
18. Neither Lake, Robicheaux, nor Sohio-Wilbert
was commercially successful. The decision was made
to abandon Lake and Robicheaux at the casing point
without attempting to complete them as producers.
None of the participants received income from his
interests in Lake, Robicheaux, or Sohio-Wilbert. The
wells have been plugged and abandoned and the under-
lying oil, gas, and mineral leases have, by their terms,
expired.
ES EL Le
|
~~ 44— —45—
19. The decision was made to attempt to complete 20. Davis Oil Company, as operator, incurred the
Pellerin and Sohio-Wilbert as producers. Pursuant to following costs in drilling and/or completing the wells
the agreement, Mr. Parvin was billed for and paid constituting the Offset program:
the following amounts: Vole
November 6, 1968 $ 1,989.15 Drilling Cost $117,022.29
November 25, 1968 7,002.36 Land Acquisition 7500.00
December 23, 1968 4,215.93 if Seaeayind
January 15, 1969 232.79 Subtotal Cost $124,522.29
February 25, 1969 32.48 Minus Contribution 106,807.40
March 7, 1969 5,864.89 Total cost $ 17,714.89
March 31, 1969 95.21
April 28, 1969 16.59 Pellerin
May 20, 1969 1,565.81 Drilling Cost $120,495.42
July 21, 1969 230.32 Land Acquisition Cost 10,000.00
May 18, 1970 «i PRE ee RL eee, Noles
Subtotal Cost $130,495.42
Total $22,651.78 Minus Contribution 106,807.40
Plaintiff received the following receipts from his in- Total Cost $ 23,688.02
terest in Pellerin:
Total Cost of Completeion $160,124.27
venmary 19,1909 $232.45 Davis’ Percentage (46.8750) 75,058.25
tages te, ana S01 80 Grand Total $ 98,746.27
March 31, 1969 187.30
May 20, 1969 290.76
June 12, 1969 244.30
July 18, 1969 153.22
July 29, 1969 229.94
August 27, 1969 78.42
October 2, 1969 142.13
November 26, 1969 98.52
Total $2,008.67
adil
On October 3, 1969, Davis Oil Company and Clinton
Oil Company entered into a written agreement under
the terms of which Clinton acquired Davis Oil Com-
pany’s interest in Pellerin for $144,843.75.
Robicheaux
Drilling Cost $ 77,842.40
Land Acquisition Cost 3,500.00
Subtotal Cost $ 81,342.40
Minus Contribution 99,307.40
Total Cost (Profit) ($ 17,965.00)
Sohio-W ilbert
Drilling Cost $625,375.08
Land Acquisition Cost 16,578.00
Subtotal Cost $641,953.08
Minus Contribution 145,787.66
Total Cost $496,165.42
Completion Attempt $ 85,463.44
Davis’ Percentage (44.375) 28,346.81
Grand Total $524,512.23
21. The Wildcat program consisting of the follow-
ing four exploratory oil and gas well prospects: (a)
Southeast Sweet Lake Prospect (Sweet Lake Land &
Oil Co. No. 1); (b) East Napoleonville Prospect (West-
over Planting Co. No. 1); (c) South Grosse Savanne
Prospect (Miami Corp. No. 1); and (d) South Valen-
tine Prospect (Frank E. Ducos No. 1). Said explora-
tory oil and gas well prospects cr the underlying oil,
gas, and mineral leases drilled thereon are described
collectively as “Wildcat Program.”
am
22. On or about July 31, 1968, Albert D. Miller,
as assignor, assigned to Davis Oil Company, as assignee,
assignor’s interest in two oil, gas and mineral leases
described in said assignment and covering the real
estate described in said lease and located in Cameron
Parish, Louisiana. Said assignment, leases or explora-
tory oil and gas well drilled thereon are herein described
as “Sweet Lake Land & Oil Co., No. 1” or “Sweet
Lake.”
23. On or about August 8, 1968, St. Emma, Inc.,
a Louisiana corporation, as lessor, and Davis Oil Com-
pany, as lessee, entered into a mineral lease covering
the real estate described in said lease and located
in Ascension Parish, Louisiana. Said lease or the explor-
atory oil and gas well drilled thereon are herein de-
scribed as “Westover Planting Co. No. 1” or “West-
over.”
24. On or about July 23, 1968, William R. Bullen,
Jr., as assignor, assigned to Davis Oil Company, as
assignee, assignor’s interest in the oil, gas, and mineral
lease described in said assignment and covering the
real estate described in said lease and located in Cam-
eron Parish, Louisiana. Said assignment or the explor-
atory oil and gas well lease dritled thereon are described
as “Miami Corp. No. 1” or “Miami.”
25. On or about July 27, 1968, Annie Le Blanc
Federine, as lessor, and Davis Oil Company, as lessee,
entered into an oil and gas lease covering the real
estate described in said lease, and located in La Fourche
Parish, Louisiana. Said leases or the exploratory oil
a
and gas well drilled thereon are described as “Frank
E. Ducos No. 1” or “Ducos.”
26. Onor about June 25, 1968, Davis Oil Company
entered into written agreements with the following
named persons under the terms of which said persons
acquired portions of Davis Oil Company’s interest in
the Wildcat program as follows:
Mortimer C. Caplin 12.5%
Harold Toppel 11.25%
Manuel Vallecillo 1.25%
Salvatore Coletta 1.25%
Sergio Camero 1.25%
Edwin Epstein 2.5%
David Epstein 2.5%
George Toppel 2.5%
Milton Toppel 2.5%
On or about July 22, 1968, David L. Kreeger and
Marvin Willig each entered into a written agreement
with Davis Oil Company, under the terms of which
Kreeger and Willig each acquired 3.25% of Davis
Oil Company’s interest in the Wildcat program.
27. On or about October 22, 1968, Blaez, Ltd.,
a limited partnership, entered into a written agreement
with Davis Oil Company under the terms of which
Blaez, Ltd., acquired 124%2% of Davis Oil Company’s
interest in Sweetlake.
28. The parties have stipulated that with the excep-
tion of the names of the parties, the percentages of
their interests, the amounts of their payments and the
—_
well prospects included, the terms of the agreements
between Davis Oil Company and each working interest
owner are the same.
29. Subsequent to plaintiff's investment in the C. E.
Savoie, the parties discussed plaintiffs participation
in further drilling programs. Following these discussions,
on or about July 24, 1968, Paul Messinger, as author-
ized agent for Davis Oil Company, at Denver, Colorado,
caused a written agreement to be prepared and signed
in duplicate on behalf of Davis Oil Company. On
or about July 24, 1968, Jack Davis, acting on behalf
of Davis Oil Company, at Denver, Colorado, mailed
to plaintiff, A. B. Parvin, at Los An: -les, California,
a letter dated July 24, 1968, and the written agreement.
Said letter and written agreement were received by
Mr. Parvin in the ordinary course of the United States
mails. Duplicate originals of both the written agreement
and operating agreement (the operating agreement is
Exhibit “B” to the written agreement), were signed
on behalf of Davis Oil Company, a partnership, by
Paul Messinger, its attorney in fact, when Mr. Parvin
received them in the mail. Mr. Parvin signed both
the written agreement and operating agreement, put
one fully executed copy in his file, and returned the
other to Davis Oil Company by his letter to Mr.
Jack Davis dated August 6, 1968. Davis Oil Company
received said letter and written agreement in the ordi-
nary course of the United States mails.
— oe
30. The following constitutes a recap of the working
interest ownership in the Wildcat program as a result
of the transactions described above:
Mr. Harold Toppel 11.2500
Mr. George Toppel 2.5000
Mr. Milton Toppel 2.5000
Mr. Manuel Vallecillo 1.2500
Mr. Sergio Camero 1.2500
Mr. Edwin Epstein 2.5000
Mr. David Epstein 2.5000
Mr. Salvatore Coletta 1.2500
Mr. Mortimer Caplin 12.5000
Mr. David Kreeger 3.1250
Mr. Marvin Willig 3.1250
Mr. A. B. Parvin 9.3750
Blaez, Ltd. 12.5000
DAVIS OIL COMPANY 34.3750
Total 100.0000%
31. Plaintiff paid Davis Oil Company the amounts
required of him for his participation in the Wildcat
program as follows: August 6, 1968—$95,000.00.
32. Neither Sweet Lake, Westover, nor Miami was
commercially successful. The decision was made to
abandon Sweet Lake, Westover, and Miami at the
casing point without attempting to complete them as
producers. None of the participants received income
from his interests in Sweet Lake, Westover, or Miami.
The wells have been plugged and abandoned and the
underlying oil, gas and mineral leases have, by their
terms, expired.
Par
33. The decision was made to attempt to complete
Ducos as a producer. Pursuant to the operating agree-
ment plaintiff was billed for and paid the following
amounts:
May 30, 1969 $13,030.22
June 3, 1969 75.17
July 21, 1969 46.88
August 12, 1969 11.25
Total $13,163.52
Plaintiff received the following receipts from his inter-
est in Ducos:
February 9, 1970 $ 1,116.09
February 26, 1970 80.06
March 23, 1970 447.52
April 24, 1970 733.43
May 25, 1970 585.69
June 24, 1970 394.61
July 24, 1970 236.85
August 24, 1970 79.67
September 22, 1970 277.86
December 24, 1970 133.01
January 25, 1971 86.97
February 23, 1971 86.90
April 27, 1971 103.09
October 27, 1971 60.96
Total $ 4,422.71
a. om —-53-—
34. Davis Oil Company, as operator, incurred the
following costs in drilling and/or completing the wells
constituting the Wildcat program:
To May 11, 1972, the working interest owners in
Ducos had received revenues of $131,505.41 and
Davis Oil Company, as owner of 34.3750 of the work-
Sweetiake ing interest had received $45,204.98.
Drilling Cost $74,755.57 36. Neither defendants nor any of them obta:ned
Land Acquisition Cost 9,163.68 or attempted to obtain a permit from the California
Subtotal - cost 83.919.25 Commissioner of Corporations for the offer or sale
Minus Contribution 145.807.40 to plaintiff of said interests in the Savoie, Offset, and
Total Cost (Profit)
($61,888.15)
Wildcat programs.
37. Communications made by Paul Messinger, Reid
Westover M. Waltman, and E. L. Karn, Jr., to Mr. Parvin,
Drilling Cost $128,409.46 or Melvin B. Fields, plaintiffs office manager, were
Land Acquisition 6,745.00 made with the knowledge and consent and under the
Suhectal cost 135,154.46 control of Davis Oil Company.
Minus Contribution 158,070.61 38. No registration statement was in effect with
Total Cost (Profit)
($ 22,916.15)
the Securities and Exchange Commission as to the
interests in the Savoie, Offset, and Wildcat programs
- miu a offered and sold to plaintiff.
mf q ze eae Cost sad SG 39. During the course of the work on the Savoie,
bs bac tanaatsd Offset, and Wildcat programs, Davis Oil Company
Subtotal Cost 135,129.49 mailed certain periodic reports to all working interest
Minus Contribution 144,024.51 owners. The Court finds that all reports required by
Total Cost (Profit)
($ 8,895.02)
the agreement to be furnished to plaintiff were in
fact so furnished.
pref Cost $205,397.48 Also, there are issues of fact between the parties
Land Acquisition Cost 13,350.00 as to whether the modus operandi provided under the
ny lacthi ghee BS dod various agreements, and in fact followed, was one under
_ Subtotal Cost 218,747.48 which plaintiff had the right to, or did, exercise that
Minus Contribution 136,346.87 degree of control over the operation of the various
Total Cost $ 82,400.61 ventures so as to make him a joint venturer and hence
Completion Cost $174,630.57 within the statutory exemption. The Court finds that
Davis’ Percentage (34.3750) 60,029.26 he did not.
Grand Total
$142,429.87
— ee mae ee
ae. a
Upon the foregoing, there is presented for determina-
tion by the Court essentially the questions of whether
these transactions by their nature came within the pur-
view of the Federal or State Securities Acts referred
to above, and additionally, whether, although coming
within the purview of either or both of the Acts,
any of the exemptions provided therein existed here.
With respect to the claim under the California Cor-
porations Code, the Court finds that the plaintiff is
a highly sophisticated business man, knowledgeable in
oil investments, not the sort of person contemplated
under the California Act to need or be afforded statu-
tory protection, who, as a member of a small and
selective class, learned, as a result of casual social
contacts, that an opportunity existed to make an invest-
ment with the defendants.
The record indicates that the fractional interests were
not offered to the public within the meaning of the
California Corporations Code. The groups which in
fact participated, and hence to whom it must be assumed
the offers were made, were both small, select and
relatively insignificant in number. It metters not that
there was an absence of close relationship between
the offerees, nor does it matter that they were relative
strangers amongst themselves as a group and to the
defendants. The record indicates that they knew, or
at least had the opportunity to know, the general charac-
ter and business skills of the defendants, together with
the risks and opportunities of the projects in which
they were to invest their money. They did so with
eyes open and they thereby made that special kind
of investment as fractional owners of oil and gas inter-
ests which were unlike the kinds of investments com-
monly known as “securities” which are placed in free
circulation. The offerees, for example, were restrained
ee a TNT
pee ae
from transferring their interest except that they might
have assigned the totality thereof.
In light of the foregoing determination by the Court,
it becomes unnecessary to make any determination as
to whether the plaintiff and defendants entered into
that kind of joint venture which would bring an exemp-
tion to the transaction out of the provisions of section
25100(m) of the California Corporations Code. The
Court is satisfied, nevertheless, that the control, or
the opportunity to control, or the right to control,
reposed in the plaintiff was not sufficient to make
him a joint venturer with the defendants for the purposes
of the statutory exemption.
Another issue tendered with respect to the claim
under the California Corporations Act relates to the
place where the transaction was negotiated, agreed upon
and finalized. As indicated above, it appears that some
conversations occurred in three states, some of which
took place in California, either in person or by telephone
calls with the plaintiff here in the State of California.
But the record indicates that all that was done within
the State of California was so fragmentary and inci-
dental to the persuading of plaintiff to participate as
not to bring transactions within the language of the
statutes which requires that the interests be “sold to
plaintiff in California” within the meaning of the Cali-
fornia statutes. This appears to be the case with regard
to the Savoie, the Offset and the Wildcat programs.
The Court determines that the transactions were con-
summated and the contracts entered into outside the
state of California and extrinsic to any conversations
between the parties conducted by telephone.
With regard to the Securities Act of 1933, the Court
makes the same factual findings as noted above. Accord-
ingly, this was not a “security” within the meaning
Bie” aN
and definition of the Act, nor did the transaction by
the manner in which it occurred fall within the purview
of the Act. Accordingly, it becomes unnecessary to
determine whether plaintiff acquired a joint venture
interest so as to make the transaction exempt under
the statute; as indicated above, the Court is satisfied
that no joint venture was entered into within the mean-
ing of the Federal Securities Law.
Similarly, with regard to the Securities Act of 1933,
the Court finds, on the same grounds noted above,
that the interests were not “offered to the public.”
With respect to the Securities and Exchange Act
of 1934, the Court finds the issues the same as noted
above and, accordingly, makes the same finding and
determination with respect to issues raised under that
Act.
Therefore, the Court finds in favor of the defendants.
and against the plaintiff on all claims. Hence, no further
issues, under Trial “B”, or otherwise, remain to be
litigated.
This memorandum of decision shall be deemed the
Court’s findings of fact and conclusions of law. Defend-
ants through their counsel, and pursuant to Local Rule
7, will prepare, serve and lodge an appropriate judg-
ment.
The Clerk of the Court will send, by United States
mail, copies of this memorandum to ali counsel for
the parties herein.
DATED: October 24, 1973.
/s/ Robert J. Kelleher
Robert J. Kelleher
United States District Judge
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.