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EXCALIBUR OIL, INC. v. SULLIVAN

August 14, 1985

EXCALIBUR OIL, INC., PLAINTIFF,
v.
LARRY N. SULLIVAN, DEFENDANT.



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

MEMORANDUM OPINION AND ORDER

Excalibur Oil, Inc. ("Excalibur")*fn1 has sued Larry Sullivan ("Sullivan")*fn2 under a melange of federal and state securities laws and under Illinois common law, claiming it suffered damages as a result of Sullivan's alleged misrepresentations in connection with a sale of securities to Excalibur. Sullivan now moves to dismiss under Fed.R.Civ.P. ("Rule") 12(b)(6). For the reasons stated in this memorandum opinion and order, Sullivan's motion is denied in principal part and granted to a narrow extent.

Facts*fn3

    1. geology reports on the proposed well sites
  and
    2. a May 11, 1982 title opinion prepared by
  Sullivan, relating to one proposed site known as
  the Jackson property.

Sullivan, an attorney, had previously prepared title opinions for Gable on other properties in which Gable had a leasehold interest (Complaint ¶ 11(c)).

On May 24, 1983 Turetzky met with Gable in Davisville, West Virginia to discuss Excalibur's purchase of working interests in two wells to be drilled: one (known as Jackson # 6) on the Jackson property and the other (known as Lambert # 2) on another parcel called the Lambert property (Complaint ¶ 10). Gable represented to Turetzky that no liens had been created on the Jackson lease since 1982 (when Sullivan had prepared the title report) and that ODC had no undisclosed liabilities (Complaint ¶ 11(a)). Turetzky told Gable Excalibur required assurances, including current title opinions on the two properties, that the oil leases on the properties were free of encumbrances (Complaint ¶ 11(b)).

Having told Turetzky Sullivan did all of Gable's title work (Complaint ¶¶ 11(c) and 11(e)), Gable took Turetzky to an office across the hall from Gable's office to meet Sullivan (Complaint ¶ 11(d)). At that meeting Turetzky repeated to Sullivan that before Excalibur would invest in the wells it needed assurances of unencumbered property leases, and he therefore asked Sullivan to prepare up-to-date title opinions (Complaint ¶ 11(f)). Sullivan responded (id.):

  [N]o problem. I know that the leases are clean.
  It is just a matter of getting the paperwork out
  to you.

Turetzky told Sullivan to bill Excalibur for his legal services rendered in preparing the title opinions, and Sullivan agreed to do so (Complaint ¶ 12).

On July 1, 1983 Gable visited Excalibur's offices in Illinois and the parties executed two participation and operating agreements, pursuant to which Excalibur was to purchase a 50% working interest in each of the to-be-drilled Jackson # 6 and Lambert # 2 wells (Complaint ¶ 13). Those agreements were subject to a warranty of title "against claims of persons claiming by, through or under" ODC (Complaint ¶ 14).

On July 28, 1983 Turetzky telephoned ODC and spoke with Young, saying Excalibur would not deliver funds in connection with the property agreements unless it received assurances the leases were clear of encumbrances (Complaint ¶ 15(a)). Young connected Turetzky with Sullivan, who again said there was "no problem" with the leases and he was just behind in preparing his paperwork (Complaint ¶ 15(d)). In reliance on Sullivan's statements, Excalibur delivered $270,000 to ODC in accordance with their agreement (Complaint ¶ 16).

On August 23, 1983 Excalibur and ODC entered into a third participation and operating agreement, under which Excalibur was to purchase a 50% working interest in a third proposed well, Lambert # 3 (Complaint ¶ 17). That agreement too was subject to a comparable warranty of title (Complaint ¶ 18). During September 1983, based on Sullivan's earlier representations about the Lambert property, Excalibur delivered $135,000 to ODC (Complaint ¶ 19).

Complaint ¶ 21 and 22 charge Sullivan's statements at the May 24 and July 28, 1983 meeting and his other representations were false in that:

    1. ODC's Jackson property lease (and hence
  Jackson # 6) was actually encumbered by:

(a) the Halliburton Agreement and

      (b) a July 22, 1983 mortgage and conditional
    assignment in the amount of $100,000 to Buckeye
    Crude Exploration, Inc.
    2. ODC's Lambert property lease (and thus
  Lambert # 2 and # 3) was subject to an August 24,
  1983 mortgage and conditional assignment in the
  amount of $100,000 to Buckeye Crude
  International, Inc.
    3. Both leases were subject to numerous
  mechanic's and judgment liens.

Excalibur's Claims

Excalibur advances a battery of claims against Sullivan, some on the theory he was ODC's attorney and agent and others predicated on his acting as Excalibur's attorney and agent.*fn4 Counts I-III assert common law claims stemming from Sullivan's alleged misrepresentations and based on several theories:

1. negligence (Count I);

    2. breach of Sullivan's fiduciary duty as
  Excalibur's attorney (Count II); and
    3. breach of Sullivan's contract with Excalibur
  to provide updated title opinions (Count III).

Counts IV-VIII allege violations of various federal and state securities laws:

    1. Securities Exchange Act of 1934 ("1934 Act")
  § 10(b) ("Section 10(b)"), 15 U.S.C. § 78j(b), and
  related Rule 10b-5, 17 C.F.R. § 240.106-5 (Count
  IV);
    2. Securities Act of 1933 ("1933 Act") § 17(a)
  ("Section 17a"), 15 U.S.C. § 77q(a) (Count V);
    3. 1933 Act § 12(2) ("Section 12(2)"),
  15 U.S.C. § 77l (Count VI);
    4. Illinois Securities Law of 1953 as amended
  ("Illinois Act") §§ 5, 6 and 7, Ill.Rev.Stat. ch.
  121 1/2, ¶¶ 137.5, 137.6 and 137.7 (citations to
  the Illinois Act will also take the form "Section
  —," omitting the prefatory 137.) (Count VII); and
    5. Uniform Securities Act of West Virginia
  ("West Virginia Act") §§ 32-1-101, 32-2-202 and
  32-4-410, W. Va.Code §§ 32-1-101, 32-2-202 and
  32-4-410 (again this opinion's citations will take
  the form "Section —," this time omitting the
  prefatory 32-) (Count VIII).

Sullivan's Responses

In support of his motion Sullivan contends:

    1. All counts should be dismissed as to the
  Lambert property transactions, because Excalibur
  has not alleged the Lambert property was
  encumbered when Sullivan made his
  representations.
    2. Excalibur's breach of contract claim is
  defective because the failure to prepare title
  opinions was not the proximate ...

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