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MCCONNELL v. SURAK

September 14, 1984

ALFRED G. MCCONNELL AND ALEXANDER H. MCCONNELL, INDIVIDUALLY AND D/B/A ODESSA PETROLEUM DEVELOPMENT, PLAINTIFFS,
v.
MICHAEL SURAK AND RANDY LANE, INDIVIDUALLY AND D/B/A S & L OIL COMPANY, DEFENDANTS.



The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Alfred and Alexander McConnell (individually "Alfred" and "Alexander," collectively "McConnells"), individually and doing business as Odessa Petroleum Development, a partnership ("Odessa," used as a singular noun), sue Michael Surak ("Surak") and Randy Lane ("Lane"), individually and doing business as S & L Oil Company, a partnership ("S & L," used as a singular noun):

    2. for like rescission under the Securities Act
  of 1933 (Count II).

Each side has filed a Fed.R.Civ.P. ("Rule") 56 motion for summary judgment on Count I.*fn3 For the reasons stated in this memorandum opinion and order, McConnells' motion is granted and S & L's motion is denied.

Facts*fn4

Alfred is a mortgage broker who, before investing in the Project, had previously made only one oil and gas deal investment — that too with the S & L partnership. Alexander is a businessman who had previously made only two such investments (both through his uncle). In each instance the investment has been a fractional interest in an oil and gas deal acquired since 1981 and has been retained for investment since acquisition.

Because of his earlier investment with S & L, Alfred had the opportunity to acquire an interest in the Project. Alfred (lacking the funds to make the investment on his own) joined with Alexander in making the investment, forming Odessa as a partnership for that purpose. On or about August 27, 1982 Odessa paid $68,000 to purchase an undivided one-eighth interest in the Project, which comprised three oil and gas leases in Crawford County, Illinois.

S & L had written Alfred in Illinois soliciting his participation in the Project. Odessa signed the Participation Agreement in Illinois. Though S & L was obviously aware of the Act's requirements, it did not register the oil and gas interests as securities under Act § 5. Instead it attempted to file with the Illinois Secretary of State an Act § 4 H report of sale to Odessa nearly three months after the sale (on November 17, 1982), but the report was unacceptable for filing because untimely (Act § 4 H requires such filing within 30 days after the date of sale).

When the Project proved a total failure, Alfred inquired as to possible remedies against S & L, one of his inquiries being directed to the Illinois Secretary of State. In response the Secretary of State advised of S & L's unacceptable (because tardy) effort at Act § 4 H filing, and Odessa (through its counsel) promptly served a timely notice of rescission under Act § 13 B. S & L refused to return Odessa's investment and this action followed.

Odessa's Right to Rescission

Unquestionably the sale of the oil and gas interest to Odessa had the requisite Illinois connections to become subject to the Act. Illinois National Bank & Trust Co. of Rockford v. Gulf States Energy Corp., 102 Ill. App.3d 1113, 1126, 57 Ill.Dec. 938, 947, 429 N.E.2d 1301, 1310 (2d Dist. 1981); Green v. Weis, Voisin, Cannon, Inc., 479 F.2d 462, 464-65 (7th Cir. 1973). Equally without question that interest was a "security" under the Act, for Act § 2.1 includes within that term any "fractional undivided interest in oil, gas, or other mineral lease." Because the interest was not an exempt security under Act § 3, Act § 5 required that it be registered before sale unless the transaction (the sale to Odessa) was exempt under one of the subsections of Act § 4.

Act § 4 H could have served as the predicate for exempting the S & L-Odessa transaction, had a proper and timely post-sale report been filed. It was not. Hence S & L must find its safe harbor in Act § 4 D or not at all. That subsection exempts in relevant part:

  The sale of fractional undivided interests in any
  oil, gas or other mineral lease . . . to any
  association*fn5 or trader buying or selling
  fractional undivided interests in oil, gas or
  other mineral rights, in frequent operations, for
  its or his own account rather than for the
  account of customers, to such extent that it ...

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