SUPREME COURT OF ILLINOIS
517 N.E.2d 1059, 118 Ill. 2d 528, 115 Ill. Dec. 373 1987.IL.1894
Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County, the Hon. Arthur L. Dunne, Judge, presiding.
JUSTICE MILLER delivered the opinion of the court.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE MILLER
Plaintiffs, Norbert A. Daleiden, David F. Thompson and Arthur J. Tremaine, filed suit in the circuit court of Cook County against defendants, Wiggins Oil Company, Mark L. Wiggins and Jerry M. Simpson, its president and vice-president, for the rescission of the sales and recovery of the amounts plaintiffs had paid for securities in defendant corporation. After a bench trial, the circuit court ordered rescission of the sales of the interests because defendants had failed to register the securities as required by section 13 of the Illinois Securities Law of 1953 (Ill. Rev. Stat. 1981, ch. 121 1/2, par. 137.13), and awarded plaintiffs $6,250 in damages. The appellate court affirmed. (139 Ill. App. 3d 715.) We allowed plaintiffs' petition for leave to appeal (107 Ill. 2d R. 315), and granted permission to the Secretary of State to appear as amicus curiae.
The Securities Law of 1953 provides, in pertinent part:
"A. Every sale of a security made in violation of the provisions of this Act shall be voidable at the election of the purchaser exercised as provided in subsection B of this Section; and upon tender to the seller or into court of the securities sold or, where the securities were not received, of any contract made in respect of such sale, the issuer, controlling person, underwriter, dealer or other person by or on behalf of whom said sale was made, and each underwriter, dealer or salesperson who shall have participated or aided in any way in making such sale, and in case such issuer, controlling person, underwriter or dealer is a corporation or unincorporated association or organization, each of its officers and directors (or persons performing similar functions) who shall have participated or aided in making such sale, shall be jointly and severally liable to such purchaser for (1) the full amount paid, together with interest from the date of payment for the securities sold . . .." Ill. Rev. Stat. 1981, ch. 121 1/2, par. 137.13.
In 1981 plaintiffs, who are tax lawyers practicing in Illinois, formed an investment partnership. Each of the partners began looking for investment opportunities, and in August of that year Arthur Tremaine contacted James Musselman, a college friend who Tremaine had heard was involved in organizing oil and gas investments in Dallas, Texas. Tremaine advised Musselman that the partnership was actively seeking a suitable oil and gas investment opportunity. Musselman initially told Tremaine that he knew of no suitable investments; however, one week later Musselman informed Tremaine that Mark Wiggins, 75% owner of defendant corporation, was seeking investors in an oil and gas venture.
After a subsequent telephone conference between Tremaine, Daleiden and Musselman, the partnership decided to purchase a 10% undivided interest in two oil and gas wells located in Sterling County, Texas. On August 31, 1981, plaintiffs received a letter of agreement from defendant corporation, which plaintiffs signed on September 9, 1981. The letter provided that plaintiffs agreed "to pay 12.5% of all costs incurred in the drilling, testing, completing, and equipping or plugging for [their] 10% of said well." At no time, plaintiffs testified, were they informed by Musselman or Wiggins that the securities would not be registered with the office of the Secretary of State or were otherwise exempt from registration under the Act. (Ill. Rev. Stat. 1981, ch. 121 1/2, pars. 137.4, .) Plaintiffs additionally testified that they considered the total amount invested to be in exchange for the 10% working interest and nothing else, and defendant Simpson testified that he considered that the "initial offering price" would normally include the original estimates to participate in the acquisition of the leasehold as well as the drilling of the wells. Plaintiffs subsequently mailed two checks in the amounts of $73,378 and $52,088, respectively, to defendants.
Approximately one year after plaintiffs invested in Wiggins Oil they encountered a great deal of difficulty in obtaining any information from the corporation or from Mark Wiggins. The partnership subsequently received notice that the well was dry. In October of 1982, becoming increasingly wary of the circumstances, Daleiden asked his attorney to investigate legal remedies which the partnership might pursue. On January 21, 1983, Daleiden and his attorney contacted the office of the Securities Division of the Illinois Secretary of State and were informed that the security in question had not been registered with that office nor had an exemption certificate been filed under section 4 of the Act (Ill. Rev. Stat. 1981, ch. 121 1/2, pars. 137.4, ). On March 4, 1983, plaintiffs' attorney sent a letter to Wiggins and Simpson notifying them that the partnership was rescinding the transaction, intended to recover all sums expended in the venture, and was commencing the present action.
In awarding plaintiffs only $6,250 in damages, the circuit court distinguished sums spent in acquiring a leasehold from sums paid for drilling and completion costs. Relying on Hammer v. Sanders (1956), 8 Ill. 2d 414, the court explained that "while the Plaintiffs properly are seeking rescission pursuant to the then-applicable provisions of the [Securities] act, they are not entitled to recover the expenses incurred by the partnership in the drilling, completing, and/or plugging of the wells that were being drilled on the leasehold that they purchased. . . . It is eminently clear . . . that these were nothing more or less than expenses of operation, and as such, . . . are not subject to recovery by the Plaintiffs." In affirming, the appellate court also found Hammer to be controlling, and held that the cost of developing oil wells is not a security within the purview of the Act. 139 Ill. App. 3d 715, 718.
Plaintiffs contend first that the circuit court erred in holding that the drilling, operating, and completion costs did not constitute securities pursuant to section 2.1 of the Act (Ill. Rev. Stat. 1981, ch. 121 1/2, par. 137.2-1). Plaintiffs submit that Hammer is factually inapplicable, and, in the alternative, urge that that decision is no longer viable and should be overruled. Arguing that Hammer "has been honored more in its avoidance than in its acceptance" (Witter v. Buchanan (1985), 132 Ill. App. 3d 273, 282), plaintiffs point to several decisions from our appellate court which have refused to accept the Hammer analysis (Wright v. Richards (1986), 144 Ill. App. 3d 450; Witter v. Buchanan (1985), 132 Ill. App. 3d 273; Illinois National Bank & Trust Co. v. Gulf States Energy Corp. (1981), 102 Ill. App. 3d 1113; Meihsner v. Runyon (1960), 23 Ill. App. 2d 446). Plaintiffs further submit that the Federal courts and courts of other jurisdictions are in accord. (Smith v. Manausa (6th Cir. 1976), 535 F.2d 353; Madigan, Inc. v. Goodman (7th Cir. 1974), 498 F.2d 233; Cross v. Pasley (8th Cir. 1959), 270 F.2d 88; Whittaker v. Wall (8th Cir. 1955), 226 F.2d 868; Repass v. Rees (Dist. Ct. Colo. 1959), 174 F. Supp. 898; Bradley v. Hullander (S.C. 1978), 249 S.E.2d 486; Kleiner v. Silver (1976), 137 Ga. App. 560, 224 S.E.2d 508; Covert v. Cross (Mo. 1960), 331 S.W.2d 576.) Claiming that the Illinois Securities Law should be read in pari materia with the Federal securities laws (Young, Exemptions from Registration Under the Illinois Securities Law of 1953, 1961 U. Ill. L.F. 205), and that those laws and the decisions construing them "make clear the intention to include all payments as the price paid for the security," plaintiffs argue that this court should hold likewise.
Plaintiffs contend further that Hammer is not binding authority because the court failed to consider section 2.5 of the Act (Ill. Rev. Stat. 1981, ch. 121 1/2, par. 137.2-5) in its ...