Appeal from the Circuit Court of Cook County; the Hon. Joseph
M. Wosik, Judge, presiding.
JUSTICE LORENZ DELIVERED THE OPINION OF THE COURT:
Rehearing denied April 18, 1985.
This is an interlocutory appeal from an order granting a preliminary injunction in favor of plaintiffs and against defendants. In the underlying cause of action, plaintiffs alleged that defendants owned and operated an oil development business and sold securities to plaintiffs in violation of the Illinois Securities Law of 1953, the so-called "Blue Sky Law." (Ill. Rev. Stat. 1981, ch. 121 1/2, par. 137.1 et seq.) Defendants admit that they are in the oil business, but deny that the transactions at issue involved "securities" within the meaning of the Act. They contend on appeal that plaintiffs failed to show any of the elements necessary to entitle them to a preliminary injunction. With respect to the substance of the Act, defendants contend that the transactions did not involve securities, that defendants did not solicit sales to plaintiffs, that one plaintiff's notice of rescission was not timely, and that plaintiffs' tender was ineffective. Defendants also contend that the trial court improperly issued and continued a temporary restraining order.
A cursory explanation of oil industry terminology may be useful before we set out the facts, but we qualify our explanation by noting that these terms have somewhat amorphous meanings, depending upon particular instruments, transactions and surrounding circumstances. Generally, in exchange for a lease which permits mineral extraction, a landowner receives a "royalty," usually one-eighth of the oil produced or one-eighth of the proceeds from the sale of that oil. The remaining interest in the oil or the proceeds, usually seven-eighths, is called the "working interest." In addition, parties may create "overriding interests," usually in connection with subleases, or they may divide royalties and working interests into fractions. (See Lynn v. Caraway (W.D. La. 1966), 252 F. Supp. 858, cert. denied (1968), 393 U.S. 951, 21 L.Ed.2d 362, 89 S.Ct. 373, Black's Law Dictionary 1195 (5th ed. 1979) ("Royalty").) With this background, we summarize the facts as follows.
In March of 1981, plaintiff Lowell Witter met with defendant Arthur Buchanan in a truck stop near Fairfield. According to Witter, the two discussed Buchanan's oil drilling activities and Buchanan said that Witter could "get in on" his next well. Buchanan's version differs slightly; he testified that Witter asked to participate in the drilling of his next oil well. In any case, Witter wrote two checks to Buchanan Oil Company, an unincorporated association owned and operated by Arthur and Joyce Buchanan. Witter stated that the first check represented drilling costs and the second, completion costs. The parties agreed that, taken together, the checks entitled Witter to a one-thirty-second working interest in the well.
From March of 1981 until some time in 1982, defendants entered into similar transactions with each of the plaintiffs: transactions varied only as to the location of the well, the size of the working interest, and the fractional cost of drilling and completion. By and large, plaintiffs first heard about defendants' oil development activities from mutual acquaintances, friends and relatives. In a typical transaction, a plaintiff would call defendants' office and ask what wells were available. One of the defendants would give the name of a well, and the plaintiff would send his or her drilling check, understanding that if the well produced oil, the plaintiff would then send a check for completion. Defendants called several witnesses who had entered into similar agreements with defendants. All of the plaintiffs, as well as defendants' witnesses, testified that in exchange for these payments, they received working interests in the respective wells, and they all considered their payments to be investments.
By the time this action was filed, plaintiffs had paid more than $500,000 and received interests in 21 different wells. These arrangements were not set out in writing; instead, as a well-reached completion, defendants listed owners and interests in a formal notice and sent it to the Rock Island Oil Company, which was responsible for selling the oil. Rock Island Oil Company, in turn, issued payments along with "division orders," statements which indicated the recipient's ownership in the well, expressed as a decimal portion of total oil production.
In July of 1982, plaintiffs received bills for operating expenses from defendants, although plaintiffs testified that defendants had never mentioned operating costs. Also during the summer of 1982, several plaintiffs noticed that the decimal numbers listed on their division orders were lower than the fractional interests they had purchased. Defendant Arthur Buchanan testified that the numbers did not match because plaintiffs' interests were computed after royalties were paid, and because their working interests were subject to a variety of "overrides." Buchanan stated further that he retained all of the remaining working interests because he paid whatever excess expenses were not covered by others' payments. Defendant Joyce Buchanan stated that she received an overriding interest in each well because the landowner leased the mineral rights to her and she subleased those rights to the Buchanans' oil business. The Buchanans' son also received overriding interests in some of the wells. Plaintiffs testified that they were not told that the Buchanans retained overriding interests, and they were not told that Arthur Buchanan acquired working interests without concurrent payment for drilling and completion.
Plaintiffs Rock and Virginia Kreis testified that they contacted Arthur Buchanan on November 16, 1981, and said that they wanted to make an investment for their children. Arthur Buchanan told them that "Jones 14" was a "good well," and they sent Buchanan $11,250. Plaintiffs introduced a report which indicated that defendants knew almost two weeks earlier that Jones 14 was dry. Plaintiff Norman Freise paid completion costs in Jones 14 on November 16, 1981, even though plaintiffs were supposed to pay completion costs only when a well proved productive. Plaintiff Witter paid for drilling costs in Jones 14 nearly four months later.
Plaintiff Witter admitted that he acted as defendants' agent in some of the sales. He further admitted that he asked defendant Joyce Buchanan in December of 1981 whether interests in a well known as "Karl Koertege" had been registered. According to Witter, Joyce Buchanan responded that defendants would file a report seeking exemption of the well from the securities law. Witter stated that in a later conversation, Joyce Buchanan asked him not to date certain checks, because defendants were in the process of filing for the exemption.
Plaintiffs introduced an exemption report for the Karl Koertege well, filed by defendants with the Secretary of State under the "limited offering" provision, section 4H of the Illinois Securities Law of 1953; that provision exempts oil and gas interests from registration as securities so long as the interest is divided among 35 or fewer investors and the total investment does not exceed $50,000. (See Ill. Rev. Stat. 1981, ch. 121 1/2, par. 137.4(H).) Defendants do not dispute that several investors' names were omitted from the report and that the total amount of the investment was understated.
In late August of 1982, Amos Oil Company notified certain plaintiffs that defendants had sold and Amos Oil had purchased three of the wells in which plaintiffs owned interests. In late September 1982, plaintiffs' counsel received certification from the Secretary of State that defendants had not registered as securities dealers, and that only one exemption report had been filed by defendants. On October 8, 1982, plaintiffs' counsel sent a letter by certified mail advising defendants that plaintiffs elected to rescind the transactions under the securities law.
On October 12, 1982, plaintiffs learned that defendants were negotiating the sale of additional wells in which plaintiffs owned interests. Also on October 12, plaintiffs filed their complaint in the circuit court of Cook County alleging fraud, misrepresentation, conversion and violation of the Illinois Securities Law of 1953; they sought temporary and permanent injunctive relief, an accounting, rescission, and punitive damages. Plaintiffs notified defendants by mail on Friday, October 22, that they would seek a temporary restraining order (TRO) on Monday, October 25. After an ex parte hearing, the circuit court granted the motion and restrained defendants from transferring their interests in any of the subject wells.
Defendants appeared on October 29, 1982, through their attorney, Gerald Mayberry. Counsel for plaintiffs and defendants agreed to several extensions of the TRO from November of 1982 through January of 1983, and jointly represented to the court that the matter would be settled. However, attorney Guy E. McGaughey, Jr., entered an appearance on behalf of defendants on January 13, 1983, and was granted leave to appear on January 17, 1983. At that time, the court ordered McGaughey, Mayberry and defendants to appear and clarify who was representing defendants. On January 28, Mayberry requested leave to withdraw as defendants' attorney, and the court granted the motion. Later, during plaintiffs' rebuttal, the court permitted plaintiffs' attorney, Mitchell Ware, to testify that he had tendered assignments of plaintiffs' interests to attorney Mayberry in December of 1982.
Many, many additional facts are argued and reargued by counsel in their briefs. Our review indicates that too many of these "facts" are not of record, and too many of the "facts" which appear in the record appear only as argument by counsel, and not as the testimony of witnesses. We recall our late colleague Justice Wilson's words when confronted with a similar situation:
"We emphasize that we disregard irrelevant and inflammatory material in reaching our determination of the issues presented. Nevertheless, some of the comments and argument in appellant's brief are inaccurate, highly improper and far exceed the bounds of zealous advocacy. We express our disapproval to remind counsel that the first purpose of the appellate brief is to inform the court of the facts, objectively, and then to persuade the court of a particular application of the law to the facts." In re Marriage of Milovich (1982), 105 Ill. App.3d 596, 599, 434 N.E.2d 811.
The trial court heard testimony from 44 witnesses on 13 separate days over the course of several months; the transcript is over 1,500 pages long, and more than 500 exhibits were introduced into evidence. On November 9, 1983, the trial court found that defendants had violated the Illinois Securities Law of 1953, and granted plaintiffs' motion for a preliminary injunction. The court enjoined defendants from transferring their interests in the subject wells, and required that proceeds from the sale of oil therefrom be placed in escrow. The order provided that plaintiffs' portion of operating expenses would be paid from the escrow pending a final disposition. Defendants filed a timely notice of appeal, and we have jurisdiction to consider this interlocutory appeal pursuant to Supreme Court Rule 307(a)(1) (87 Ill.2d R. 307(a)(1)).
• 1 The thrust of defendants' appeal is that plaintiffs have shown none of the elements necessary to entitle them to a preliminary injunction. Generally, a party seeking an injunction must show an ascertained right in need of protection, a likelihood of success on the merits, and inadequate remedy at law and irreparable injury. (People ex rel. Edgar v. Miller (1982), 110 Ill. App.3d 264, 269, 441 N.E.2d 1328.) The decision to grant or deny a preliminary injunction is committed to the sound discretion of the trial court, and ordinarily, a reviewing court will not disturb the decision unless an abuse of discretion appears. (Lonergan v. Crucible Steel Co. of America (1967), 37 Ill.2d 599, 612, 229 N.E.2d 536.) However, the rule of discretion is predicated upon the theory that a preliminary injunction is not a final adjudication of the merits; where such an order effectively decides the merits of the case, a reviewing court should consider whether the trial court's findings are against the manifest weight of the evidence, and whether the trial court erred legally. See Dixon Association for Retarded Citizens v. Thompson (1982), 91 Ill.2d 518, 440 N.E.2d 117.
The parties' arguments in this court create some ambiguity concerning the proper scope of review. Defendants note that the trial judge did not sign the findings of fact, and they imply that the court therefore made no findings. Of course, under the abuse of discretion standard, the relevant factual inquiry at the trial level is whether plaintiffs have established a fair question of prima facie entitlement to preliminary relief (see Dixon Association for Retarded Citizens v. Thompson (1982), 91 Ill.2d 518, 524-25, 440 N.E.2d 117, quoting City of Chicago v. Airline Canteen Service, Inc. (1978), 64 Ill. App.3d 417, 432-33, 380 N.E.2d 1106) and findings of fact, as such, are unnecessary. Contrary to defendants' implication, the trial court expressly incorporated the findings of fact into its order. Plaintiffs, on the other hand, quizzically suggest that the facts should be measured by the higher standard, whether they are against the manifest weight of the evidence.
Notwithstanding plaintiffs' willingness to shoulder the heavier burden, we believe that the appropriate standard of review is the abuse of discretion standard ordinarily applied to preliminary injunctions. The findings in support of the preliminary injunction do not amount to a final adjudication of the rights of the parties: at the conclusion of this appeal, jurisdiction will revest in the trial court, and that court will be free to alter or amplify its findings and to grant such final relief as is warranted by law. Accordingly, our review focuses upon whether the trial court abused its discretion when it concluded that plaintiffs established a fair question of prima facie entitlement to a preliminary injunction.
• 2 The crux of this dispute is whether plaintiffs are likely to succeed on the merits, and so we first consider the substantive issues arising from the Illinois Securities Law of 1953 (the Act) (Ill. Rev. Stat. 1981, ch. 121 1/2, par. 137.1 et seq.). The Act regulates sellers of "securities." Defendants posit that plaintiffs paid for the drilling and completion costs of the oil wells, and did not purchase "securities" within the meaning of the Act. In addition, defendants argue that they did not violate the Act because there was no "solicitation," and that recovery should be barred because plaintiffs' notice of rescission was untimely and their tender was insufficient.
Section 2.1 of the Act defines "security" as:
"* * * any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, investment fund share, face-amount certificate, voting-trust certificate, fractional undivided interest in oil, gas, or other mineral lease, right, or royalty, option, put, call, privilege, indemnity or any other right to purchase or sell a contract for the future delivery of any commodity offered or sold to the public and not on a registered contract, market, or, in general, any interest or instrument commonly known as a security, or any certificate of deposit for, certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing." (Emphasis added.) (Ill. Rev. Stat. 1981, ch. 121 1/2, par. 37.2-1.)
Defendants maintain that the documentary and testimonial evidence indicates that plaintiffs paid for drilling, completion and operating expenses. Defendants rely upon Hammer v. Sanders (1956), 8 Ill.2d 414, 134 N.E.2d 509, cert. denied (1956), 352 U.S. 878, 1 L.Ed.2d 79, 77 S.Ct. 100, and Burke v. Zipco Oil Co. (1974), 19 Ill. App.3d 909, 312 N.E.2d 399, for the proposition that such payments do not constitute securities.
In Hammer v. Sanders, our supreme court considered 51 transactions in the context of the Illinois Securities Law of 1919 (See Ill. Rev. Stat. 1953, ch. 121 1/2, par. 96 et seq.) Forty-five of these transactions were evidenced by written contracts; the typical contract provided that defendants would assign an undivided one one-hundred-twenty-eighth working interest in specified oil and gas leases in exchange for $242.19, and ...