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Hammer v. Sanders

JUNE 20, 1955.

H.C. HAMMER ET AL., APPELLEES,

v.

CHARLES W. SANDERS ET AL., INDIVIDUALLY AND AS CO-PARTNERS DOING BUSINESS AS SANDERS-FYE DRILLING COMPANY, APPELLANTS.



Appeal from the Circuit Court of Cook county; the Hon. HARRY M. FISHER, Judge, presiding. Judgments against defendants reversed: order denying defendants' motion for summary judgment reversed: cause remanded with directions.

MR. JUSTICE FRIEND DELIVERED THE OPINION OF THE COURT. This is a consolidation of three suits at law brought by each of the three plaintiffs, respectively, seeking a rescission of various transactions between them and defendants for alleged violations of the Illinois Securities Act (Ill. Rev. Stat. 1953, ch. 121 1/2, sec. 97 et seq. [Jones Ill. Stats. Ann. 13.02 et seq.]) and the Federal Securities Act of 1933 (Title 15, Ch. 2A, Par. 77a et seq.). Defendants filed counterclaims for the plaintiffs' proportionate share of the cost of equipping and maintaining certain oil wells. The transactions grew out of oil drilling operations in southern Illinois and Indiana. Motions for summary judgments were filed by plaintiffs and defendants. The trial judge denied defendants' motions and allowed those of plaintiffs. He likewise denied defendants' motion in arrest of judgment and directed execution to issue forthwith. Defendants appeal.

For an understanding of the facts and issues involved we summarize the salient portions of the record. Defendants are co-partners in the firm known as Sanders-Fye Drilling Company, with offices in Olney, Illinois. The complaints consolidated herein are in all respects identical except for the allegations relating to the proportionate share of the respective working interests and amounts paid by each of the plaintiffs. They allege that the defendants, through Paul W. Heller or Lenn Franke, offered for sale and sold to plaintiffs the respective oil and gas lease interests described in the complaints; that defendants issued to plaintiffs certain instruments evidencing the respective interests of plaintiffs in the oil and gas leaseholds, upon receipt by defendants from plaintiffs of the amounts of money listed in each of the complaints; that these instruments and the interests in oil and gas leases represented and evidenced thereby were securities in Class D, under the Illinois Securities Law; that the right to sell or offer for sale these interests was not authorized by the Securities Law of the State of Illinois, and that such action constituted violation of the Illinois Securities Law; that about January 7, 1953 plaintiffs elected to declare void the purported sales of the securities, and on said date each of the plaintiffs sent to defendants letters electing to declare the sales void and tendering back to Sanders-Fye Drilling Company the interests in oil leases and asking that each of the defendants, severally and jointly, pay plaintiffs the total amount of the cash consideration involved. The letters further demanded payment, threatened to sue and prohibit defendants from binding plaintiffs for any expenses whatsoever in connection with the maintenance of the oil wells. The second count of the complaints reiterated the foregoing allegations, claiming violations of the Federal Securities Act of 1933, and a cause of action based thereon.

In their answers defendants denied that the instruments referred to in the complaint constituted oil and gas lease interests, with certain exceptions, denied that those instruments were sold to plaintiffs, but stated that they are contracts for the drilling of oil wells on the various described properties, and that in each instance the stated monetary consideration was paid for the drilling of an oil well; that in most instances the actual drilling had commenced prior to the execution of the documents and was based on oral agreements to pay a proportionate share of the cost of drilling. It is further averred that plaintiffs and defendants expressly agreed that the assignment of a working interest in the properties was to be made upon the drilling of a commercially productive well. Defendants denied that any of the instruments constituted interests in oil or gas leases or securities within the contemplation of the Illinois Securities Act.

As the first affirmative defense the answers allege that plaintiffs asked defendants if they could join with them in various oil drilling operations, and that they became associated in May 1952 for the purpose of creating a joint venture to drill oil wells, that plaintiffs were to pay their proportionate share of the drilling cost of each well, the location of which was to be determined by the various parties to the agreement, with the actual drilling operations to be under the supervision of defendants; that defendants agreed to assign to plaintiffs a proportionate share of the lease on the property on which the well was to be drilled in the event that a commercial well was discovered, the proportion of the lease to be assigned to each to be determined by reference to the proportion which his respective share of the drilling costs bore to the total drilling expenses. Defendants further allege that all monies paid by plaintiffs to defendants during 1952 were reported in the respective Federal income tax returns for the plaintiffs in that year as having been expended for drilling and development costs, and no portion of these monies is shown to have been expended for acquisition costs. It is further alleged that with the exception of the oil and gas property described in certain exhibits attached to plaintiffs' complaints defendants did not sell, assign, transfer or convey to any of the plaintiffs an interest in any oil or gas lease; and that with those exceptions plaintiffs have received nothing from defendants which can be tendered back to them.

As the second affirmative defense it is alleged that the lease covering the various properties was executed by the landowner to defendants, and that with the exception of the property described in the aforementioned exhibits no interests therein was ever sold or transferred. It is alleged, in the alternative, that plaintiffs were engaged as a part of their respective business in purchasing and holding gas and oil leases and fractional interests thereof, and that they were associated together as co-partners in purchasing and holding such leases; and that, should the instruments be construed as securities they cannot, as plaintiffs contend, be designated as Class D securities, but must be considered as Class B securities, and therefore exempt from the provisions of the Illinois Securities Act.

As an additional affirmative defense it is alleged that the total number of individuals participating in these ventures, including all defendants and plaintiffs, was seventeen; that participation by plaintiffs was initiated by them; and that all participants in these transactions were residents of Illinois. In their counterclaim defendants seek to recover from plaintiffs their share of the cost of equipping and maintaining the wells developed.

The motions for summary judgments filed by each of the plaintiffs had in support thereof affidavits and the complaints of the plaintiffs, as well as the exhibits attached thereto, the affidavits stating in substance that the allegations of the complaints are true, and that the exhibits are correct photostatic copies. The affidavits state that the plaintiffs met O.R. Thoureen, who was introduced as one of the partners in Sanders-Fye Drilling Company; that a conversation ensued in which plaintiffs stated that they were dissatisfied "with the way things are going"; that they felt they should see the principals of the drilling company; that Lenn Franke guaranteed the last well unequivocally but that the well was dry, and they wanted to know what defendants were going to do about it; that Thoureen said he was sorry about that, but that Franke should not have guaranteed the wells; that he would like to do something to make the plaintiffs feel better, and that he could offer a percentage interest in three going wells for $2,000 which was the defendants' cost; that plaintiffs told Thoureen they would not be interested in any new investments unless defendants made good on the old ones; whereupon plaintiffs Morris Norian and Hammer each purchased one-sixty-fourth (1/64th) interest in two leases and a five-one-hundred-twenty-eighth (5/128th) interest in another for $2,000. The affidavits further state that plaintiffs had agreed to pay reasonable attorneys' fees, and further affidavits were filed by the respective attorneys setting forth the amount of work done and their respective opinions as to the amount of fees involved.

The motion for summary judgment filed on behalf of defendants had supporting affidavits, as well as excerpts from the depositions of the plaintiffs, and also copies of income tax returns filed by plaintiffs during the years in question. An affidavit of Thoureen sets forth his version of the conversation related in the affidavits of the plaintiffs and is diametrically opposed to the factual averments contained therein; it relates in substance that these were drilling ventures with the participants sharing proportionately in the drilling and equipping, with the exception that Sanders-Fye retained a one-fourth interest in the proceeds of all wells drilled, and that all parties, including Sanders-Fye, participated in the equipping of the wells; also that the only time an assignment was made was in the event a producing well was discovered. Franke's affidavit likewise contains a conflicting factual recitation of the conversations related in plaintiffs' affidavit, and sets forth in effect that this was a drilling venture, capital expenses being incurred only in the event of producing a commercially desirable well. The income tax returns of Morris Norian and Hammer disclose that the transactions in question were described as oil venture intangible drilling costs, drilling dry holes at various locations in southern Illinois and Indiana. The entire cost of drilling was deducted as a business expense. Each of the plaintiffs reported in his income tax returns that he was in the business of oil operations, with the exception of Hammer who described it as oil exploration. This was evidently done as a basis for these deductions.

The judgment order entered by the court provided that Hammer recover from defendants the sum of $40,328.18, that Morris Norian recover the sum of $31,279.86, that Richard Norian recover the sum of $6,988.36, and that consideration of the matter of plaintiffs' reasonable attorneys' fees be reserved. Included in the amount of these judgments are all monies paid by plaintiffs for drilling costs, for equipping wells and for the purchase of interests in producing wells. No tender has been made by any of the plaintiffs at any time of any of the monies received by them from the sale of oil by the producing wells in question, and no attempt has been made in any manner to place the defendants in the position they formerly were in prior to the drilling of the dry holes in question. As stated, the Federal income tax returns of plaintiffs disclose that they deducted as oil operators all the drilling expenses as operating expenses of an oil venture; and these same dollar amounts so deducted for tax purposes are included in the judgment, predicated on the theory that they are payment for securities.

The basic issue in this litigation arises out of the respective contentions of the parties as to the interpretation of certain exhibits attached to the complaint. Plaintiffs of course contend that the instruments attached as exhibits are securities within the meaning of the act, and their suit is predicated on that contention. Defendants take the position that they are not. These exhibits are form leases, identical except for the filling in of certain blanks, and because of their importance in the determination of the issues involved, we set forth an exact copy of the form used:

"Sanders-Fye Drilling Co. Contractors-Oil Producers Lamkin Building Olney, Illinois

Date. . . . . . . . . . Re. . . . . . . . . . . . . . . . . . . . . . . County State

"Dear Sir:

"This letter will confirm our understanding regarding your acquisition of an interest in leases on ...


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