United States District Court, Northern District of Illinois, E.D
August 14, 1985
EXCALIBUR OIL, INC., PLAINTIFF,
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.
During 1983 Oil Development Company ("ODC") was engaged in
the business of
obtaining mineral leases and drilling, completing and
operating oil and gas wells in West Virginia (Complaint ¶ 5).
In May 1983 ODC employees John Gable ("Gable"), Ronald Young
("Young") and J. Alan Gable (he and Gable are collectively
referred to as "Gables") solicited Excalibur's President John
Turetzky ("Turetzky") to purchase working interests in wells to
be drilled on properties subject to existing oil and gas leases
in West Virginia (Complaint ¶ 8). In connection with the
solicitation, Gables and Young delivered to Excalibur
(Complaint ¶ 9):
1. geology reports on the proposed well sites
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
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).
On October 21, 1983, at a meeting attended by Turetzky,
Excalibur Chairman Thomas Falese, Gable, Young and Sullivan,
Falese and Turetzky again asked Sullivan to provide Excalibur
with written title opinions.
Sullivan once more said he would do so but was just behind in
his paperwork. At the meeting Sullivan acknowledged the
existence of a $1 million mortgage security agreement and
assignment of production to Halliburton Company (the
"Halliburton Agreement") affecting the Jackson lease, but he
said it did not encumber Excalibur's interest in Jackson # 6
(Complaint ¶ 20).
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
3. Both leases were subject to numerous
mechanic's and judgment liens.
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
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
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
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).
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
2. Excalibur's breach of contract claim is
defective because the failure to prepare title
opinions was not the proximate cause of
3. No action exists under Section 10(b) or Rule
10b-5 for an attorney's misrepresentations or
omissions as to his or her own client.
4. Excalibur's Section 17(a) claim is defective
in three respects:
(a) Section 17(a) does not provide for an
action by a client against his own attorney.
(b) Complaint ¶ 138 alleges wrongful conduct
"in connection with the purchase of working
interests by Excalibur," while the 1933 Act
requires wrongful conduct in connection with the
sale of securities.
(c) Liability under the 1933 Act extends only
to sellers and offerors or those who aid and
abet them. Excalibur has not alleged Sullivan
fits any of those categories.
5. Sullivan does not belong to any of the
categories of persons that may be held liable
(a) Section 12(2);
(b) the Illinois Act; or
(c) the West Virginia Act.
Each of those contentions will be dealt with in turn.
Sullivan points out Excalibur has not identified a single
specific encumbrance that affected the Lambert property at the
time Sullivan represented both properties were
encumbrance-free. Complaint ¶ 21 identifies two encumbrances on
the Jackson property. Complaint ¶ 22 specifies a mortgage on
the Lambert property dated August 24, 1983, nearly one month
after the last of Sullivan's representations as to title. Apart
from those three specific encumbrances, Excalibur alleges only
(Complaint ¶ 22):
[T]he leases are subject to additional claims,
liens or encumbrances as follows:
(b) Numerous mechanic's liens; and
(c) Numerous judgment liens.
Sullivan argues that unless his statements misrepresented
the state of the Lambert title, Excalibur can show no causal
nexus between those statements and any damages Excalibur
sustained through the Lambert investments. He says each
transaction must be analyzed separately, and any link between
his misrepresentations as to the Jackson property and
Excalibur's losses on the Lambert wells is too attenuated to
sustain liability under any theory of recovery, whether in
contract or tort or under the securities laws. And Sullivan
urges Excalibur's allegation of "numerous" mechanic's and
judgment liens encumbering "the leases" is so vague as to be
insufficient under Rule 9(b) to allege an encumbrance on the
Excalibur's responsive memorandum clarifies it is
not claiming the Lambert property was encumbered at the time of
Sullivan's misrepresentations. Instead Excalibur argues
Sullivan's misrepresentations as to the Jackson property
proximately caused the Lambert damages because Excalibur would
not have entered into the Lambert investments had Sullivan
truthfully represented the status of the Jackson title.
It will be recalled Turetzky was first referred to Sullivan
May 24, 1983, to confirm Gable's representation as to the
absence of new liens on the Jackson property since Sullivan's
preparation of his May 11, 1982 title opinion. Complaint ¶ 23
then alleges that if Sullivan had told Turetzky the truth about
the encumbrances on that property:
Excalibur would have realized that Gable was not
trustworthy and honest, would have been on notice
that the financial condition of Oil Development
Company was not as represented, would not have
consummated [the Jackson # 6/Lambert # 2 deal],
and would not have entered into [the Lambert # 3
Under the operative rules for reading complaints for Rule
12(b)(6) purposes, that states a sufficient nexus between
Sullivan's misrepresentations and Excalibur's losses as to
both the Jackson and the Lambert wells.
Breach of Contract
That analysis also disposes of Sullivan's claim of no causal
connection between Excalibur's losses and Sullivan's failure
to prepare current title opinions. Sullivan
Mem. 4 asserts a nonsensical argument in that respect:
Had Sullivan prepared title opinion [sic],
plaintiff would have been damaged nonetheless.
The report simply would have informed plaintiff
that there were problems with its investment
(assuming the alleged encumbrances existed).
To the contrary, Complaint ¶ 23 says a truthful title opinion
would have told Excalibur much more than "that there were
problems with its investment." It would also have informed
Excalibur Gable was "not trustworthy" and ODC was in worse
financial shape than it let on. And Excalibur would not "have
been damaged nonetheless," for it would have backed out of the
Sullivan R.Mem. 6-7 altered his causation argument somewhat,
but the new version is as untenable as the original. Sullivan
contends Excalibur cannot assume his report — even if timely —
would have been accurate. That would render it speculative to
say the lack of a timely report caused Excalibur's injuries.
Moreover, Sullivan argues, an inaccurate report would give rise
to liability only in tort (malpractice), not contract.
Those new arguments — premised as they are on an unnaturally
minimalist conception of the Excalibur-Sullivan contract —
violate the command in Wolfolk (see n. 3) to view the
Complaint's allegations in the light most favorable to
Excalibur. According to Complaint ¶¶ 11(f) and 12, Excalibur
told Sullivan it required assurances of clear title before
investing in the wells, and Sullivan then agreed to prepare
current title opinions. Surely a reasonable inference from
those allegations is that Sullivan knew time was important and
agreed to have the opinions completed before Excalibur was
required to deliver funds.
There is something terribly offensive about a lawyer's
assertion that his contract to prepare a title opinion called
for nothing more than his delivery of an unreliable piece of
paper. Necessarily implicit in any such contract is the
lawyer's duty to investigate the title with reasonable
diligence and to report his findings accurately. Sullivan's
failure to fulfill those obligations would certainly amount to
a breach of contract. And if Sullivan indeed failed either to
discover an obvious encumbrance or to report it to Excalibur,
no speculation is involved in concluding the breach was a
proximate cause of Excalibur's losses.
Finally Sullivan R.Mem. 7-8 argues in the alternative:
1. Sullivan had no contractual obligation to
deliver the written opinions before Excalibur
delivered funds to ODC.
2. Even if Sullivan had such an obligation,
Excalibur waived it by tendering funds to ODC
based on Sullivan's oral representations.
This opinion has already disposed of the first of those
arguments. As for the second, even if the Complaint supported
a waiver theory (as it does not), and even if such a
fact-based question could appropriately be decided on a motion
to dismiss (as it cannot), at most Sullivan can claim
Excalibur waived Sullivan's obligation to make timely delivery
of a document memorializing his opinion. Under the Complaint
Sullivan does not (and cannot) argue Excalibur also waived
Sullivan's contractual obligations (1) to investigate the
titles and (2) accurately to report his findings before the
delivery of funds. Excalibur may well have believed Sullivan's
oral representations just before Excalibur's payment to ODC
were based on an investigation undertaken pursuant to
Sullivan's contract with Excalibur.
Attorney-Client Relationship Issues
Sullivan spins out an elaborate analysis of why a client
should not be able to invoke Rule 10b-5 to sue his or her own
attorney for misrepresentations or omissions. Sullivan urges
Rule 10b-5 was designed only to protect buyers from
misrepresentations by sellers acting at arm's length to
their own adverse interests. Moreover, Sullivan Mem. 7-8
argues the scope of an attorney's duties to a client is
determined exclusively by the terms of the agreement under
which the client retained the attorney.
Where Sullivan jumps the tracks is in his premise that
Excalibur has sued Sullivan only as its attorney. True enough,
portions of the Complaint — such as Count I's breach of
contract claim and Count II's breach of fiduciary duty claim —
are predicated on an alleged lawyer-client relationship between
Sullivan and Excalibur. But the securities law claims treat
Sullivan as ODC's attorney, or indeed as attorney for both
Excalibur and ODC.*fn6 Even were the different claims
inconsistent (and they are not necessarily so), that is
entirely permissible under the Rules. See 5 Wright & Miller,
Federal Practice and Procedure: Civil § 1283 (1969), explaining
that facet of Rule 8(e)(2).
That obviates any need to decide whether Section 10(b) and
Rule 10b-5 permit a client's suit against his or her attorney.
There is clearly enough to support the reasonable inference
Sullivan acted as ODC's attorney, even if he simultaneously
purported to act (or Excalibur reasonably believed he was
acting*fn7) as Excalibur's attorney:
1. Gable introduced Sullivan to Turetzky as the
attorney "who did all of Gable's title work"
(Complaint ¶ 11(e)).
2. Sullivan had prepared a title opinion for
Gable on the Jackson property in 1982, just a
year before the transactions at issue here
(Complaint ¶ 9(b)).
3. Gable's very introduction of Turetzky to
Sullivan in response to Turetzky's request for
assurances regarding the title implied Sullivan
was Gable's agent and was empowered to make
representations for Gable.
4. Sullivan's office was just across the hall
from Gable's (Complaint ¶ 11(d)).
5. Sullivan sat in with Gable and others on at
least one meeting with Excalibur representatives
(Complaint ¶ 20).
Nothing flows from the absence of a Complaint allegation
specifically identifying Sullivan as ODC's attorney.
Sullivan concedes that nothing in Section 10(b) or Rule
10b-5 exempts the seller's lawyer from liability to a purchaser
merely because of his or her status as attorney. As Judge
Friendly put it in SEC v. Frank, 388 F.2d 486, 489 (2d Cir.
[A] lawyer, no more than others, can (sic) escape
liability for fraud by closing his eyes to what
he saw and could readily understand.
That especially holds true where the attorney is sued on the
basis of his or her affirmative misrepresentation, rather than
merely as a passive participant in the alleged fraud.
Sohns v. Dahl, 392 F. Supp. 1208, 1213 n. 8 (W.D.Va. 1975) ("A
license to practice law would not clothe an individual with
armor against his direct misrepresentations to a purchaser or
Precisely the same analysis applies to Sullivan's arguments
that Section 17(a):
1. does not permit a client's suit against his
or her attorney; and
2. requires wrongful conduct in connection with
the sale rather than the purchase of securities.
To the extent Excalibur has sued Sullivan in his capacity as
ODC's agent and counsel, Excalibur has not (1) sued its own
lawyer or (2) sued Sullivan for purchaser-oriented activities.
Its action against Sullivan is
rather based on his participation with ODC in carrying out a
Sullivan as a Proper Securities Law Defendant
Sullivan's remaining attacks are on the propriety of suing
him under any of the securities laws Excalibur calls upon.
That necessitates a separate look at each statutory provision.
1. Sections 12(2) and 17(a)
Sections 12(2) and 17(a) speak in nearly identical terms in
specifying who may be held liable.*fn9 Despite that parallel
language, some of the case law has expanded liability under
Section 17(a) to a broader range of persons than under Section
Thus Section 17(a) labels as equivalent to a "seller"
— and therefore renders liable — anyone who merely "aids and
abets" in a sale. SEC v. Coven, 581 F.2d 1020, 1028 (2d Cir.
1978). By contrast, although a number of courts have similarly
extended Section 12(2) liability to all those who participate
actively in the illegal sale of securities (see, e.g., In re
Caesars Palace Securities Litigation, 360 F. Supp. 366, 383
(S.D.N.Y. 1973)), other authority (see, e.g., the discussion in
Briggs v. Sterner, 529 F. Supp. 1155, 1172-73 (S.D.Iowa 1981))
has rejected the "aiding and abetting" theory under that
For present purposes, however, any such distinction is
wholly academic. As the following discussion reflects,
Sullivan qualifies as a seller even under a narrower reading
of Section 12(2), thus rendering unnecessary any analysis in
broader Section 17(a) terms.
Sullivan claims his preparation of title reports for ODC
— both the 1982 title report on the Jackson property and like
reports on unrelated properties — form an insufficient basis to
impose "seller" liability. Citing Pharo v. Smith, 621 F.2d 656
(5th Cir.), reh'g granted and case remanded, 625 F.2d 1226 (5th
Cir. 1980), he says his "mere participation" in the events
leading up to the transactions does not make him a statutory
But Pharo is of no consolation to Sullivan. Unlike its
generalized language (which requires a fleshing out of the
"mere participation" notion), numerous authorities (as
exemplified by Junker v. Crory, 650 F.2d 1349, 1360 (5th Cir.
1981) (reaffirming Pharo), SEC v. Seaboard Corp.,
677 F.2d 1289, 1294 (9th Cir. 1982) and Hagert v. Glickman, Lurie, Eiger
& Co., 520 F. Supp. 1028, 1035 (D.Minn. 1981)) contain more
precise formulations of what the "seller" concept embraces.
Sullivan clearly falls within any of those formulations as
much more than a "mere participant." His representations as to
title were certainly "a substantial factor in causing the
transaction[s] to take place" (Junker). Excalibur's injury
"flowed directly and proximately from the actions" (Seaboard)
of Sullivan — in the classic tort-liability sense requiring
only "a" rather than "the" proximate cause. And in Hagert's
terms, Sullivan was "uniquely positioned to . . . acquire
material information [and] disclose his findings" with regard
to the crucial condition of title.
2. Illinois Act
Illinois Act Section 5 requires securities registration by
the issuer, controlling person or dealer. Section 13, which
establishes rescission as the exclusive civil remedy of a
defrauded purchaser (see this Court's opinion in Guy v. Duff &
Phelps, Inc., No. 84 C 2813, slip op. at 20-21 (N.D.Ill. July
12, 1985)) or the purchaser of an unregistered security, limits
the class of potential defendants to (Section 13A):
The issuer, controlling person, underwriter,
dealer or other person by or on behalf of whom
the sale was made, and each underwriter, dealer,
or salesperson who shall have participated or
aided in any way in making such sale. . . .
See, Shofstall v. Allied Van Lines, Inc., 455 F. Supp. 351, 358
In Illinois Act terms Excalibur alleges:
1. ODC never registered or qualified the
working interests sold to Excalibur.
2. That nonregistration entitles Excalibur to
rescission under Section 13.
3. Sullivan, as a "salesperson who . . .
participated or aided" in the sale, is liable for
the rescissionary damages.
1. No allegations of fact place him within the
category of those liable under Section 13.
2. In particular, his past occasional
employment by ODC in preparing the 1982 Jackson
property title report and other title reports
does not render him a "salesperson" under Section
"Salesperson" means an individual, other than
an issuer or a dealer, employed, authorized or
appointed by a dealer, issuer or controlling
person to sell securities.
No reported Illinois case has interpreted that definition of
"salesperson." This Court is therefore left with the statutory
But as an aid to construction, it is profitable to compare
the scope of the Illinois Act with that of the 1933 and 1934
Acts, under which this opinion has already found Sullivan
potentially liable. Tcherepnin v. Knight, 389 U.S. 332, 336, 88
S.Ct. 548, 553, 19 L.Ed.2d 564 (1967) teaches the 1933 Act
falls into the category of remedial legislation, hence to be
broadly construed. And the same is true of the 1934 Act. Not
only do the federal statutes afford victims of security fraud a
broad range of remedies, but each of Sections 10(b), 12(2) and
17(a) defines those liable for its violation as including "any
person" acting in connection with, or in, the offer or sale of
any securities. Understandably, then, the cases discussed
earlier show how federal courts have read that language
expansively to encompass all sorts of persons who participate
materially in security sales.
By contrast, the Illinois Act is a far more restrictively
structured statute. As this Court held in Guy, it affords only
a rescissionary (and not a damages) remedy for violations.
Moreover, it more carefully lists and defines the specific
classes of persons who may be subjected to liability. Those
classes comprise persons who regularly play central and
specialized roles in securities transactions and who, pursuant
to Section 8, must themselves be registered with the Secretary
Importantly, lawyers are not among those specifically
required to be so registered. And after all, Excalibur seeks to
characterize a lawyer, retained only to render legal services,
as having been "employed, authorized or appointed by [ODC] to
That would do impermissible violence to the normal meaning
of language. Gable and others, not Sullivan, solicited
Excalibur and induced it to invest in the wells. Excalibur had
been "sold" on the desirability of the investment before it
ever met Sullivan. He was asked only to confirm that the deal
conformed to a portion of Gable's description, and it was
Gable's description that had already provided all the
information on the strength of which Excalibur agreed to
purchase. Sullivan's role in the transaction simply did not
render him a "salesperson."*fn10
3. West Virginia Act
Quite unlike the Illinois Act (and much like the 1933 and
1934 Acts), the West Virginia Act extends civil liability to
a broad category of persons involved in the fraudulent sale of
securities. Section 4-410(b) imposes liability not only on the
seller "but on every broker-dealer or agent who materially
aids in the sale." It goes on to define "agent" broadly as:
any individual other than a broker-dealer who
represents a broker-dealer or issuer in effecting
or attempting to effect purchases or sales of
As with the Illinois Act, no West Virginia case interpreting
the statute has been cited to this Court.
1. His earlier title work for Gable did not
constitute the work of an agent "in effecting or
attempting to effect [the] purchases or sales of
2. ODC never retained him for the purpose of
being its agent.
But Sullivan glosses over the more direct role he played in
the sales to Excalibur. On the Complaint's allegations, his
face-to-face and direct telephonic representations to
Turetzky, at the special request of ODC, were of the very
essence of agency.*fn11
And there is equally no doubt (to
quote the statute) that he "materially aid[ed]" in "effecting"
Only Complaint Count VII succumbs to Sullivan's Rule
12(b)(6) motion and is dismissed. In all other respects the
Complaint survives. Sullivan is ordered to answer the
Complaint on or before August 26, 1985.