Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-86-01202/USCOURTS-ca10-86-01202-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

CASCADE ENERGY AND METALS CORPORATION, 

a Nevada corporation, 

Plaintiff-Appellee, Cross-Appellant, 

v. 

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) 

) 

) 

) 

) 

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) 

) 

) 

FEB 1 G 1990 

ROBERT L. HOECKER 

Clerk 

No. 86-1156 

No. 86-1157 

JEFFERY G. BANKS, KENNETH CALDWELL, COASTAL No. 86-1202 

COMPUTER INVESTMENTS, a California partnership, 

ELMER J. DAVIS, HARMATZ and HODOWSKI, a 

California partnership, DAVID G. HENRY, ROGER A. 

MANN, H.E. MOSES, ROBERT A. NICKERSON, ) . 

PETER P. SAMARIN, HERBERT W. STOLTENBERG, EDWIN 

STOLTENBERG, CHRIS WAUGH, SAMUEL HARMATZ, 

BERNARD HODOWSKI, PATRICIA STOLTENBERG, MANN 

CALDWELL PARTNERSHIP, a partnership, DELFORD R. 

ASHLEY, GEORGE SLATER, PATRICIA SLATER, ROBERT 

DOUB, SAM HAMBARIAN, ALYCE HAMBARIAN, LIONEL 

ASCHER, A.C. NEJEDLY, R.E. DONAHEY, GRACE V. 

DUNCAN and ELLIOT WEINBERG, 

Defendants-Appellants, Cross-Appellees. 

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} 

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JEFFERY G. BANKS, KENNETH CALDWELL, COASTAL ) 

COMPUTER INVESTMENTS, a California partnership, ) 

ELMER J. DAVIS, HARMATZ and HODOWSKI, a California ) 

partnership, DAVID G. HENRY, ROGER A. MANN, MANN ) 

CALDWELL PARTNERSHIP, H.E. MOSES, ROBERT A. ) 

NICKERSON·, PETER P. SAMARIN, PATRICIA STOLTENBERG, ) 

HERBERT W. STOLTENBERG, EDWIN STOLTENBERG, CHRIS ) 

WAUGH, DELFORD R. ASHLEY, GEORGE SLATER, PATRICIA ) 

SLATER, ROBERT DOUB, SAM HAMBARIAN, ALYCE ) 

HAMBARIAN, LIONEL ASCHER, A.C. NEJEDLY, R.E. ) 

DONAHEY, GRACE V. DUNCAN, ELLIOT WEINBERG, ) 

BERNARD HODOWSKI and SAMUEL HARMATZ, . ) 

Counterclaimants, Crossclaimants, Cros~-

Counterdefendants, Appellants, CrossAppellees, 

v. 

CASCADE ENERGY AND METALS CORPORATION, 

) 

) 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 1 
( 

and 

Counterdefendant, Cross-Counterclaimant, 

Crossclaim Defendant, Appellee, 

) 

) 

) 

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W. DAVID WESTON, TELEGRAPH MINE LIMITED, ) 

a partnership, REX MONTIS SILVER CO., TELEGRAPH ) 

MINE JOINT VENTURE, GOLD TECHNICS, LTD., a limited) 

partnership, INTERPHASE CORP., JAMES F. PETERS, as ) 

TRUSTEE of the GNOLAUM UNITRUST, ) 

Cross-Counterclaimants, Cross-Defendants, 

Crossclaim Defendants, Appellees, 

Cross-Appellants. 

) 

) 

) 

) ____________________________ ) 

HAROLD MASUNAGA, MARION HARADA, UKIO AYABE, 

LYLE MULLER, CHARLES HIGASHI, JOSEPH GREEN, and 

WILLIAM OHARA, 

Amici Curiae. 

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) 

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Appeal from the United States District Court 

for the District of Utah 

(D.C. No. 82-C-1223C) 

Steven w. Snarr (Michael E. Talbot with him on the brief), Salt 

Lake City, Utah for Cascade Energy and Metals Corp. 

Richard A. Love of Reish & Luftman, Los Angeles, California 

(George M. Haley of Haley & Stolebarger, Salt Lake City, Utah, 

with him on the brief) for Jeffery G. Banks, Kenneth Caldwell, 

Coastal Computer Investments, Elmer J. Davis, David G. Henry, 

Roger A. Mann, Mann Caldwell Partnership, Robert A. Nickerson, 

Peter P. Samarin, Patricia Stoltenberg, Herbert w. Stoltenberg, 

Edwin Stoltenberg, Delford Ashley, George Slater, Patricia Slater, 

Robert Doub, Sam Hambarian, Alyce Hambarian, and Lionel Ascher 

(the "Associate Defendants"). 

Richard A. Love of Reish & Luftman, Los Angeles, California for 

Samuel Harmatz, Bernard Hodowski, A.C. Nejedly, Chris Waugh, H.E. 

Moses, R.E. Donahey, Grace v. Duncan, Elliot Weinberg, and Harmatz 

and Hodowski partnership (the "Gold Technics Defendants"). 

A. Park Smoot, Salt Lake City, Utah for w. David Weston. 

Ronald S. George, Pocatello, Idaho for Telegraph Mine Limited. 

Lynn P. Heward, Salt Lake City, Utah for Rex Montis Silver Co. 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 2 
Delwin T. Pond, Salt Lake City, Utah for Gnolaum Unitrust. 

Delwin T. Pond, Salt Lake City, Utah for Amici Curiae. 

Before McKAY, BARRETT, and EBEL, Circuit Judges. 

EBEL, Circuit Judge. 

This diversity case involves a dispute over a gold mine. The 

basic controversy is between the mine's principal promoters 

(W. David Weston and his affiliated entities) and a group of 

investors in the mine. 

The Weston entities .basically appeal from the district 

court's determination after a bench trial that they breached their 

fiduciary duties to the investors by concealing large cost 

overruns during the mine's development and by then trying to 

assess the investors for the overruns. The Weston entities also 

challenge the district court's decision to pierce the corporate 

veil among the Weston entities and to nullify the investors' 

obligation to make additional payments on various promissory 

notes. The investors generally appeal from the district court's 

holding that their interests in the mine were not "securities'' 

under federal and state securities laws and that the Weston 

entities did not defraud the investors into purchasing their 

interests at the outset. 

We affirm in part, reverse in part, and remand. 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 3 
Parties 

Plaintiff Cascade Energy and Metals Corporation ("Cascade") 

is a Nevada corporation which owned and managed a gold mine. 

During the time relevant here, Weston owned or controlled over 50 

percent of Cascade's stock and served as its president. Six other 

entities affiliated with Weston ultimately became parties to this 

lawsuit: Telegraph Mine Limited ("Telegraph Limited"), a Utah 

limited partnership having Cascade as its general partner; Rex 

Montis Silver Co. ("Rex Montis''), a Utah corporation, 41 percent 

of whose stock was owned by Weston; Interphase Corporation 

(''Interphase"}, a Utah corporation, 77 percent of whose stock was 

owned by Weston; Gnolaum Unitrust, a revocable trust established 

by Weston for the benefit of himself, his wife, and his children; 

Gold Technics, Ltd. ("Gold Technics"), a California limited 

partnership having Rex Montis as its general partner; and 

Telegraph Mine Joint Venture, a joint venture among Telegraph 

Limited, Rex Montis, and Gold Technics. 

This case started when Cascade filed suit in the United 

States District Court for the District of Utah against various 

investors in the gold mine (the ''Associate Defendants"}, seeking 

to assess them for additional capital contributions. 1 Cascade 

also sued eight limited partners of Gold Technics (the ''Gold 

Technics Defendants"} for allegedly interfering with the Associate 

1 The Associate Defendants are Jeffery G. Banks, Kenneth 

Caldwell, Coastal Computer Investments, Elmer J. Davis, David G. 

Henry, Roger A. Mann, Mann Caldwell Partnership, Robert A. 

Nickerson, Peter P. Samarin, Patricia Stoltenberg, Herbert w. 

Stoltenberg, Edwin Stoltenberg, Delford Ashley, George Slater, 

Patricia Slater, Robert Doub, Sam Hambarian, Alyce Hambarian, and 

Lionel Ascher. 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 4 
Defendants' purported duty to pay additional capital assessments. 2 

Another group of investors in the gold mine, who generally support 

Weston and Cascade in this litigation, are not parties but have 

been allowed to appear in this Court and below as amici curiae. 3 

The Associate Defendants and the Gold Technics Defendants 

(collectively, the "defendants") counterclaimed against Cascade 

and brought additional claims against Weston and his affiliated 

entities. 4 Weston and his entities, in turn, counterclaimed 

against the defendants. 

Background 

The following diagram summarizes the relationships among the 

principal parties at relevant times: 

2 The Gold Technics Defendants are Samuel Harmatz, Bernard 

Hodowski, A.C. Nejedly, Chris Waugh, H.E. Moses, R.E. Donahey, 

Grace v. Duncan, and Elliot Weinberg and Harmatz & Hodowski. 

3 The non-party investors appearing as amici curiae are Harold 

Masunaga, Marion Harada, Ukio Ayabe, Lyle Muller, Charles Higashi, 

Joseph Green, and William Ohara. 

4 When we refer to the "Weston entities," we mean Cascade, 

Telegraph Limited, Rex Montis, Gnolaum Unitrust, Interphase, and 

the Telegraph Mine Joint Venture. We do not include Gold Technics 

as a Weston entity because, although Rex Montis is Gold Technics' 

general partner, essentially all of Gold Technics' limited 

partners are adverse to Weston in this litigation. 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 5 
May 1976 

Cascade leases 100% of mine 

to Telegraph Limitede 

CASCADE 

(Nevada corporation affiliated with 

Weston; owner of mine) 

Jan. 1979 

Telegraph Limited forms joint 

venture with Gold Technics 

to operate mineo 

GOLD TECHNICS 40% 60% TELEGRAPH LIMITED -----------"---

( California limited (Utah limited partnership 

partnership) affiliated with Weston) 

TELEGRAPH MINE JOINT VENTURE 

Sept. 1980 

Other Weston 

affiliates become involved. 

REX MONTIS 

(managed b Cascade) 

(Utah corporation affiliated 

with Weston; buys 30% 

interest in mine lease 

from Gold Technics in 

exchange for 480,000 shares 

of Rex Montis stock; becomes 

general partner of Gold 

Technics and member of 

Joint Venture) 

Dec. 1980 

Joint venture sells 35 

working interests to investors. 

INTERPHASE 

(Utah corporation 

affiliated with 

Weston; performs 

accounting services 

for Joint Venture, 

Cascade, Telegraph 

Ltd., Rex Montis, 

and the Telegraph 

Mining Associates) 

TELEGRAPH MINING ASSOCIATES 

(purchasers of 35 working interests in 

mine; Associates hire Cascade to manage 

mine on their behalf) · 

I 

GNOLAUM UNITRUST 

(Utah trust affiliated with Weston; member 

of Telegraph Mining Associates; purchaser 

of l/35th working interest in mine) 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 6 
The following recitation of facts is based upon the district 

court's findings, which we cannot conclude are clearly erroneous. 

In 1974, Cascade purchased the ''Telegraph" gold mine, located 

in eastern California. In 1976, Cascade leased the mine to 

Telegraph Limited, a Utah limited partnership controlled by Weston 

having Cascade as its general partner. In January 1979, Telegraph 

Limited sold a 40 percent interest in the mine lease to Gold 

Technics for $150,000 ($50,000 in cash with the balance in an 

installment note). Gold Technics is a California limited 

partnership established by two accountants (Bernard Harmatz and 

Samuel Hodowski} and a group of their accounting clients and 

Weston. 

At that time, in January 1979, Telegraph Limited (as 60 

percent owner} and Gold Technics (as 40 percent owner} entered 

into a joint venture, the Telegraph Mine Joint Venture (the "Joint 

Venture"), to develop the mine. Cascade served as the manager of 

the Joint Venture. 

In September 1980, Gold Technics sold three-fourths of its 40 

percent interest in the mine to Rex Montis for 480,000 shares of 

unregistered Rex Montis stock. After the transaction, the mine 

lease and the Joint Venture were owned 60 percent by Telegraph 

Limited, 30 percent by Rex Montis, and 10 percent by Gold 

Technics. The transaction was contingent upon the completion of 

the sale of 35 working interests in the mine·to private investors 

and upon Rex Montis' compliance with California's regulations 

governing transactions in unregistered securities. However, Rex 

Montis never obtained approval of the sale from the California 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 7 
( 

Corporations Commissioner and never physically conveyed the Rex 

Montis shares to Gold Technics. 

In December 1980, the Joint Venture (through Cascade as 

manager) sold 35 undivided working interests in the mine to 

various individual and corporate investors. The investors 

collectively were known as the Telegraph Mining Associates (the 

"Associates"). As part of the tr~nsaction, the Associates agreed 

to hire Cascade (of which Weston was president) to develop and 

operate the mine on the Associates' behalf. The Associates 

further agreed to pay the Joint Venture, as sublessee of the mine, 

an ''annual minimum royalty" of $74,285 per l/35th unit, c6nsisting 

of $30,000 in cash and a $44,285 recourse royalti note. 5 That 

amount, $74,285, was to be paid each year, regardless of whether 

there was any mineral production. 6 However, by the third year, 

"production proceeds" were supposed to pay all or most of the 

$74,285-per-unit minimum royalty payment. 

The sale of the 35 units raised $1.05 million immediately, of 

which $800,000 was to be lent back to the Associates by the Joint 

Venture as a development loan. Cascade, acting as the Associates' 

project manager, was to use the $800,000 development loan to 

5 The transaction's underlying documents refer to this $74,285 

payment as an "~nnual minimum royalty." The Associates paid the 

annual royalty to the Joint Venture, which held an exclusive 

sublease on the mine, for the right to mine minerals on the 

property. 

6 In the first and second years, the $74,285-per-unit minimum 

royalty payment was to be paid with $30,000 in cash and a $44,285 

promissory note. For the third year and subsequent years, the 

Associates were allowed to make the entire $74,285 payment with a 

promissory note in that amount. In other words, the Associates 

were required to make $30,000 cash payments only in the first and 

second years. 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 8 
develop the mine for the Associates and to prepare the site for 

gold production.7 

The Associates who purchased the 35 units fell generally into 

four groups: (1) persons affiliated with Gold Technics, and their 

friends and acquaintances; (2) other persons whom Weston solicited 

at a gold convention and elsewhere; (3) a group of Hawaiian 

investors who were participants in some of Weston's other 

enterprises (and who are not parties to this appeal but have filed 

an a~icus brief stating their position); and (4) Weston himself 

and some of his affiliated entities, including his revocable 

trust, Gnolaum Unitrust. In this litigation, the first and second 

Associate groups are allied against Weston, and the third and 

fourth Associate groups are allied with him. 

The offering memorandum for the 35 working interests 

contained charts showing income and cash flow projections. Those 

projections forecast that the Associates would never have to 

contribute additional cash to repay the promissory notes or the 

$800,000 development loan because by the third year, operating 

profits from the project would be more than enough to satisfy 

those obligations. 8 

7 The proceeds of the $800,000 development loan were deposited 

into an Associates' bank account for which Cascade, as manager of 

the project, had signature authority. 

8 The memorandum forecast that in 1981, 13,200 tons of ore would 

be mined and milled, resulting in the production of over $3 

million worth of gold and silver ($86,034 per l/35th unit). The 

memorandum further projected that in 1982, 52,800 tons of ore 

would be mined and milled, resulting in the production of over $12 

million worth of gold and silver ($344,135 per l/35th unit). 

Those projections were based on a gold price of $525 per ounce and 

a silver price of $15 per ounce. The same level of production and 

[Footnote continued ••• ] 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 9 
However, problems with the mine arose almost immediately. 

'The original plan was to sink a 400 foot shaft and erigage in 

underground mining. The district court found that as of July 

1981, Weston (as president of Cascade, the mine's operating 

manager) realized that the $800,000 development loan was not 

enough money to sink the shaft and to get the mine into 

production. (Accounting Findings 14.) So, according to the 

district court, Weston implemented a plan for obtaining more money 

from the Associates. Instead of beginning underground operations, 

Weston persuaded the Associates to generate some quick profits by 

letting Cascade perform surface mining and then use a "heap 

leaching" method to get the gold out of the ore. In general, heap 

leaching entails piling up a mound of ore and soaking it with a 

cyanide solution, and then processing the gold-laden solution that 

gradually seeps out. 

By September 1981, the heap leaching method had not produced 

any gold and some Associates started to get suspicious. Several 

Associates flew to Cascade's headquarters in Salt Lake City and 

inspected the books. Although they found some inconsistencies and 

evidence that Weston was using a portion of their money for his 

personal affairs, they were largely persuaded by his explanations 

and by his insistence that core samples showed that· there really 

was gold in the ore. The Associates then set up a management 

committee to oversee the operation's finances. They instituted a 

[ ••• footnote continued] 

income predicted for 1982 was forecast for later years through 

1991. 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 10 
two-signature check policy, requiring the committee's permission 

.before Cascade wrote major checks. 

Months passed. To make a long story short, costs kept 

escalating, production was delayed month after month, assays 

revealed that there was not much gold in the ore that Cascade 

spent its time surface mining, the heap leaching method never 

produced much gold, and Cascade rapidly consumed the $800,000 

development loan with little or no gold to show for it and without 

even starting to sink a shaft. All the while, Weston kept telling 

the Associates that if they waited just a few more months and if 

they put just a little more money into the operation, the heap 

leaching system would produce some gold and the project would get 

off the ground. 

By February 1982, the $800,000 development loan had been 

consumed and there still was no gold production. Weston informed 

the Associates that he and Cascade were loaning the project money 

to keep it afloat. He told the Associates that he was going to 

assess them for all of the "development costs'' beyond the initial 

$800,000. The proposed assessments were in addition to the 

$74,285 minimum royalty payment which the Associates were 

obligated to make each year to the Joint Venture. Weston started 

sending out ~ssessment invoices. Some Associates paid the 

invoices, others did not. None of the.Associates at that time 

raised the contention that assessments were not allowed under the 

Joint Operating Agreement. The district court found that many 

Associates who paid their assessments did so not because they felt 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 11 
obligated to, but rather because they were told that they soon 

would be repaid from the promised gold production. 

By July 1982, there still was no gold. Three of the 

Associates went to the mine and sampled the heap leaching pile 

themselves. After assaying the samples, they found that the pile 

had little gold in it and that Weston and Cascade had been mining 

poor-quality ore. Meanwhile, the assessments kept building. 

In August 1982, Weston held an Associates meeting and 

insisted that the Associates pay their assessments. He told them 

that the project had to have more money and could become 

profitable with just 60 more days of heap leaching. (Exh. 93-A, 

meeting transcript at 25, 30-31.) Some Associates paid their 

assessments after that meeting, others did not. 

In September 1982, the Associates ordered Weston to stop 

crushing ore because the crushing operation was the biggest 

expense and there still was no gold. The Associates sought to put 

limits on the quality of ore mined so that they would not have to 

pay for Cascade's mining of low-quality ore. 

In November 1982, the Hawaiian investors (who were associated 

with some of Weston's other ventures) withdrew their consent -from 

the Associates' management committee that had been formed to 

represent the Associates' interests. The management committee 

then disbanded for lack of a majority. -· 

In December 1982, the Associates (other than the Hawaiian 

Associates and the Weston-affiliated Associates) informed Weston 

that under the Joint Operating Agreement, the Associates could not 

be assessed for additional development or production costs beyond 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 12 
initial $800,000 development loan. Cascade then filed suit in 

ihe district court against the Associates who had not paid their 

assessments (that is, the Associate Defendants). The Associate 

Defendants counterclaimed against Cascade and brought third-party 

claims against Weston and the other Weston entities for fraud, 

breach of fiduciary duty, and securities violations. Then 

essentially everyone counterclaimed and cross-claimed against 

everyone else. 9 

After a lengthy bench trial on liability issues and a later 

bench trial on accounting issues, the district court held in 

substance that: (1) Weston and his entities had not defrauded the 

Associates into buying their working interests; (2) the Joint 

Operating Agreement did not permit the assessment of the 

9 There was some confusion below over whether the defendants' 

claims against Weston and the other Weston entities besides 

Cascade should be denominated "third-party claims" or 

"counterclaims" or "cross-claims." The district court noted that 

defendants' claims technically were not third-party claims because 

"no indemnity or judgment over was thereby sought pursuant to Rule 

14, Fed. R. Civ. P." (Findings 17 n.l.) Rule 14 allows a 

"defending party, as a third-party plaintiff," to sue a "person 

not a party to the action who is or may be liable to the thirdparty plaintiff for all or part of the plaintiff's claim against 

the third-party plaintiff." The trouble is that in a technical 

sense, defendants' claims also are not counterclaims or crossclaims because Weston and the other Weston entities were not yet 

parties to the action at the time defendants' claims were filed. 

Rule 13, Fed. R. Civ. P., provides that a "counterclaim" is a 

claim "against any opposing party" and that a "cross-claim" is a 

"claim by one party against a co-party." In substance, the 

defendants' claims-are in the naiure of separate lawsuits -~hat 

have been consolidated with Cascade's action. There is no 

question that all of the claims asserted below were properly 

before the district court. The issue is what to call them. We 

think that because defendants effectively brought new parties into 

the litigation for the purpose of asserting new claims against 

them, the defendants' claims against Weston and the other Weston 

entities are more like third-party claims than counterclaims or 

cross-claims. Consequently, we will label them so. 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 13 
/Sociates for additional cash needs beyond the initial $800,000 

development loan; (3) after the working interests were sold, 

Weston and his entities had breached their fiduciary duties and 

had acted in bad faith by concealing the fact that there was no 

way for the mine to be put into production for only $800,000 and 

by trying to extract additional cash from the Associate Defendants 

through so-called assessments; (4) Weston and his entities had 

misappropriated large·sums from the Joint Venture and had 

converted the Joint Venture's funds for their own use; and 

(5) Weston, Cascade, and Weston's other entities were alter egos 

of each other. 

As a remedy, the district court ordered that: (1) Weston and 

Cascade account for $629,474.63 in funds misappropriated from the 

Joint Venture (thus giving Gold Technics, as a 10 percent owner of 

the Joint Venture, $62,947.46); (2) Weston and Cascade return 

$70,449.68 in assessments wrongfully collected from the Associate 

Defendants; (3) Weston and Cascade pay $265,000 in attorneys fees 

to the Associate Defendants for bringing the meritless suit to 

assess them for additional mining costs ($240,000 to the Associate 

Defendants and $25,000 to those of the Gold Technics' Defendants 

who were Associates); (4) the Associate Defendants' working 

interests be terminated and the Associate Defendants be relieved 

of any further obligation to make royalty payments or to perform 

on the promissory notes given for past royalty payments; (5) the 

Associate Defendants be relieved of any obligation to repay the 

$800,000 development loan; (6) the Joint Venture be terminated and 

dissolved, and Gold Technics and its limited partners forfeit all 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 14 
interest in the mine lease and the Joint Venture; (7) Weston and 

Cascade pay Gold Technics $5,000 as nominal damages for the 

"wrongful fru~tration and de facto termination" of the Joint 

Venture; (8) Gold Technics be terminated and dissolved, and all 

damages and stock owed to Gold Technics ($62,947.46 in damages 

from the accounting, $5,000 in nominal damages, and the 480,000 

shares of unregistered Rex Montis stock held by Rex Montis but 

belonging to Gold Technics) be distributed directly to Gold 

Technics' limited partners in proportion to their interests. 

Because of the district court's alter ego finding, the judgments 

against Weston, Cascade, and the other Weston entities ran against 

each of them. 

Issues On Appeal 

Weston, Cascade, and the other Weston entities raise the 

following issues on appeal: 

1. Whether the district court erred in holding that the 

Joint Operating Agreement between the Associates and Cascade did 

not require the Associates to make any cash capital contributions 

for development and production costs beyond the initial $800,000 

development loan. 

2. Whether the district court erred in holding that Weston 

and Cascade breached their fiduciary duties to the Associate 

Defendants by lea·rning early on that the mine could not be put 

into production for $800,000, concealing that fact, and then 

attempting to assess the Associate Defendants for additional 

capital. 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 15 
3. Whether the district court erred in holding that Weston 

and Cascade had failed to account for large sums that Weston and 

-Cascade allegedly misappropriated from the Joint Venture. 

4. Whether the district court erred in holding that 

Telegraph Limited, Rex Montis, Interphase, and Gnolaum Unitrust 

all were alter egos of Weston and Cascade. 

5. Whether the district court erred in relieving the 

Associate Defendants of all liability for future mine royalty 

payments and for promissory notes given for past royalty payments. 

6. Whether the district court erred in holding that the 

Associate Defendants were relieved of all liability for the 

$800,000 development loan which the Joint Venture had made to the 

Associates from the proceeds of the working-interests sale. 

7. Whether the district court erred in awarding attorneys' 

fees to the Associate Defendants for the alleged bad faith of 

Weston and Cascade in filing suit to assess the Associate 

Defendants for additional cash capital contributions. 

8. Whether the district court erred in holding that the 

Associate Defendants and the Gold Technics Defendants did not 

engage in any tortious conduct or breach any fiduciary duties owed 

to Weston's revocable trust, Gnolaurn Unitrust (which owned one of 

the 35 working interests), or to the other Weston entities. 

The Associate Defendants (and those of the Gold Technics 

Defendants who also are Associates) raise the following issues on 

appeal: 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 16 
1. Whether the district court erred in holding that the 35 

working interests in the mine sold to the Associates were not 

securities under federal and California securities laws. 

2. Whether the district court erred in holding that Weston 

and his entities were not liable for fraud or negligent 

misrepresentation in the offering of the 35 working interests. 

3. Whether the district court erred in holding that the 

Associates could not recover from the Weston entities for adverse 

tax consequences stemming from the failure of the mining 

operation. 

The Gold Technics Defendants raise the following issues on 

appeal: 

1. Whether the district court erred in refusing to rescind 

Gold Technics' .September 1980 sale of a 30 percent interest in the 

mine to Rex Montis in exchange for 480,000 shares of Rex Montis 

stock. 

2. Whether the district court erred in failing to award 

damages for the conversion of 38,000 shares of Rex Montis stock 

which belonged to Gold Technics but which Weston had pledged to a 

bank for a loan to Cascade. 

3. Whether the district court erred in failing to award 

additional damages for the termination of the Joint Venture. 

4. Whether the district court erred in failing to award any 

monetary compensation to one of Gold Technics' limited partners, 

R.E. Donahey. 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 17 
Discussion 

I. ISSUES RAISED BY WESTON ENTITIES 

A. Assessments Under Operating Agreement (Weston Entities' 

Issue No. l} 

The district court held that the Joint Operating Agreement 

between the Associates and Cascade did not require the Associates 

to make any cash capital contributions for development and 

production costs beyond the initial $800,000 development loan. We 

agree. 

Paragraph 13(c) of the Agreement specifically limited the 

Associates' liability for additional payments to each Associate's 

share of the minerals that were actually produced and removed from 

the mine: 

Notwithstanding anything to the contrary contained 

herein, the Operating Manager [Cascade] shall have no 

authority, express or implied, to enter into any 

commitment or obligation on behalf of the Purchasers 

[that is, the Associates] or otherwise do anything which 

would subject the Purchasers, or any of them, to any 

liability in excess of the Purchasers' respective 

interests in the minerals mined, milled and removed from 

the Property and their interest in any proceeds from the 

sale of said minerals. 

(Emphasis added.) In other words, pursuant to paragraph 13(c), 

the Associates could not be required to make additional cash 

contributions to the enterprise when no gold was produced • 

. However, Weston argues that the Agreement's prior paragraph, 

paragraph 13(b), which provided that the Associates were liable 

for all costs of the mine, obligated the Associates to make 

additional cash contributions: 

All costs and liabilities incurred in the exploration 

and development of the Property and the mining, milling 

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., 

and removal of ore therefrom shall be borne and paid for 

by the Purchasers in proportion to their interests. 

In our view, paragraphs 13(b) and 13(c), when read together, 

provided that the Associates were required to pay additional 

development and production costs out of their share of the 

contemplated gold production. Under the plain language of 

paragraph 13(c) -- which begins "Notwithstanding anything to the 

contrary contained herein" -- the Associates are not responsible 

for additional payments beyond each Associate's share of the 

minerals that were actually produced and removed from the mine. 

That interpretation of the Agreement is confirmed by parole 

evidence heard by the district court. Although Weston testified 

that he thought cash assessments were proper under paragraph 13(c) 

(see,~, Tr. 415-20), the lawyer who drafted the Agreement (who 

had been hired by Weston to handle the legal work for the 

transaction) testified that par~graph 13(c) was intended to mean 

what it said: the Associates could not be assessed under the 

Agreement for additional cash contributions beyond ~he value of 

the minerals produced. (Williams Dep. at 64-66.) Thus, as the 

district court held, Weston's assertion that the project collapsed 

because the Associate Defendants wrongly failed to pay the 

additional cash assessments, is without merit. The Associate 

Defendants were under no obligation to do so under the express 

terms of the Agreement. 

B. Breach Of Fiduciary Duty (Weston Entities' Issue No. 2) 

The district court held that Weston •a'nd Cascade breached 

their fiduciary duties to the Associate Defendants by quickly 

learning early on that the mine could not be put into production 

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.c $800,000, concealing that fact, and then attempting to assess 

the Associate Defendants for additional capital. (Findings 100-

01.) In particular, the district court held that Weston (as 

Cascade's president) acted in bad faith by trying to squeeze 

additional money from the Associate Defendants for a project that 

Weston knew was not economically feasible. The district court 

found that Weston did not start out with fraudulent intentions, 

but that by at least July 1981, Weston knew that the project could 

not be successful without more cash beyond the $800,000 

development loan, and he embarked upon a scheme to get it: 

Adhering to my interlocutory findings concerning the 

good faith of Weston in connection with the original 

offering in reliance upon the existing reports of 

geologists and his analysis of and projections from them 

as to underground operations, I am now clearly convinced 

that Weston's bad-faith conduct had its inception on or 

prior to the writing of July 28, 1981, and that a breach 

of Cascade's implied covenant of fair and honest dealing 

as a fiduciary toward the Associates continued from that 

time to and including the institution of the present 

action •••• 

(Accounting Findings 14-15.) 

Our standard for reviewing the district court's factual 

findings in an action tried without a.jury is whether the findings 

are clearly erroneous. Fed. R. Civ. P. 52(a). In applying that 

standard, we are required to give "due regard ••• to the 

opportunity of the trial court to judge. the credibility of 

the ~itnesses.'' Id. After reviewing the record here, we cannot 

say that the district court's finding that Weston and Cascade 

breached their fiduciary duties to the Associate Defendants is 

clearly erroneous. 

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The following evidence supports the district court's finding 

that Weston and Cascade acted in bad faith in trying to assess the 

Associate Defendants. 

First, the Joint Operating Agreement is clear on its face. 

See Part I.A above. Cascade had no power to subject the 

Associates to any liability in excess of their "respective 

interests in the minerals mined, milled and removed from the 

Property." (Agreement 11 13(c); emphasis added.) If no minerals 

were removed from the property, then the Associate Defendants 

could have no additional liability. 

Second, Weston filed suit seeking the assessments knowing 

that the lawyer who principally drafted the Agreement and who was 

responsible for the basic structure of the transaction, Lawrence 

Williams, had stated that the Agreement prohibited any cash 

assessment of the Associates. On December 2, 1982, before the 

lawsuit was filed, one of the Associates wrote a letter to 

Weston's attorney and to Weston stating that Williams had 

confirmed "in no uncertain terms that the agreements do not 

repeat -- do not give Cascade or anyone else the right to demand 

assessments from the Associates." (Exh. 131.04.) Weston filed 

suit nonetheless. 

Third, the breach of fiduciary duty by Weston and Cascade 

also- was evidenced by their failure to reveal promptly and 

candidly that the $800,000 development loan was not sufficient to 

get the mine into product.ion. Sometim~ before the $800,000 was 

exhausted, Weston and Cascade were obligated to step forward and 

tell the Associate Defendants that: (1) the Offering Memorandum's 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 21 
projection that $800,000 was sufficient to sink a 400 foot mine 

shaft and to get the mine into production was wrong; 

(2) additional capital was required to make the project succeed; 

and (3) the Associates had various options, such as borrowing 

money, selling additional working interests, making additional 

capital contributions, or terminating the project. Weston and 

Cascade revealed none of those things, but instead sought to 

impose upon the Associate Defendants their mandatory-assessment 

theory which happened to be the solution that was most 

favorable to Weston and Cascade -- while continuing to mouth the 

increasingly frail hope that gold production was just around the 

corner. 

Fourth, as the district court held, Weston's bad faith was 

shown by the fact that as early as July 1981, Weston was 

recharacterizing certain key definitions in a way that would 

support his later argument that the offering documents 

contemplated a gap between the mine's development phase and the 

production phase, during which time the Associates assumed 

unlimited cash liability. In particular, although the offering 

documents consistently described the $800,000 loan as a 

"Development Loan," Weston's July 1981 correspondence with the 

Associates started calling it a "~-development loan." See Exh. 

39, July-28, 1989 letter to-Associates. Moreover, although the 

offering memorandum's financial projections defined "Preproduction 

Expenses" to be all funds necessary "to place the Telegraph Mine 

at Production Phase," and stated that those expenses were to total 

$800,000 (see Financial Projections, Note D), Weston's July 1981 

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/ forma divorced "preproduction expenses'' from the $800,000 

figure and showed them continuing long after production was to 

begin. See Exh. 46. 

Fifth, when Weston first suggested that the Associates should 

contribute additional cash to the project, he portrayed the 

requests not as mandatory assessments, but rather as voluntary, 

short-term loans to be repaid quickly from gold production. On 

April 15, 1982, Weston wrote a letter to the Associates notifying 

them that the "pre-development loan funds plus the interest 

accrued thereon has now been expended in the work of predevelopment." {Exh. 41.03.) The letter stated that the 

Associates would be "invoiced directly" for future "production 

expenses," and that each Associate's share of the expected gold 

production would be sold to pay the billings if the invoices were 

not paid in cash: 

Id. 

(U]nless arrangements are made to pay for the costs of 

mining and processing, royalties, taxes, and sucp other 

expenses as are incurred in the operation, the costs of 

mining will be billed to [the Associates] directly on a 

quarterly basis and sufficient ounces of the· production 

necessary-to cover these costs will be sold. 

Thus, as the district court held, the "first mention of 

assessability for the cost of production" was not grounded on the 

mandatory nature of the assessments, but rather "on the theory 

that if not paid, deficiencies would be taken care of out of the 

sale of the gold." {Findings 54.) Weston was still proffering 

that view as late as August 1982 when, at an Associates meeting, 

Weston displayed some small souvenir ba·rs of gold from the first 

production of the mine and stated that they would be distributed 

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to those Associates who paid their second quarter assessment 

billing. Weston did not resort to his view that the assessments 

were mandatory; in late 1982, until his attempts at coaxing 

largely failed. Those facts indicate that Weston did not really 

think that the assessments were mandatory when Cascade sued the 

Associate Defendants for payment. 

In summary, we by no means are holding that a fiduciary's 

decision to press an arguable contract interpretation that turns 

out to be incorrect constitutes a breach of fiduciary duty. We 

hold only that there ~as sufficient evidence to support the 

district court's finding that Weston's interpretation of the 

contract was patently wrong, that Weston knew it was wrong, that 

Weston concealed that fact from the Associate Defendant~, and that 

Weston pushed the interpretation nonetheless in order to benefit 

himself and Cascade at the expense of those to whom he owed a 

fiduciary duty. Those actions constituted a fiduciary breach. 

C. Accounting Issues (Weston Entities' Issue No. 3) 

The district court held that Weston and Cascade and certain 

other ~eston entities misappropriated or otherwise failed to 

account for $629,474.63 belonging to the Joint Venture. The 

district court's accounting concerned the misappropriation claims 

of only the Gold Technics Defendants and not those of the 

Associate Defendants. 10 

lO Just as the Gold Technics Defendants alleged that Weston and 

Cascade had misappropriated large sums of money from the Joint 

Venture, the Associate Defendants alleged that Weston and Cascade 

had misappropriated or mismanaged money belonging to the 

Associates. The district court did not address the Associate 

Defendants' accounting claims because (1) the only money allegedly 

[Footnote continued ••• ] 

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There is no dispute that Caicade, as managing agent of the 

Joint Venture, owed the venturers the duty to account properly for 

all·sums entrusted to it. Nor does Cascade dispute that once Gold 

Technics established its right to an accounting, the burden of 

proof shifted to Cascade to show how the Joint Venture's funds 

were expended and to establish any credits to which Cascade might 

be entitled. Cf. Restatement (Second) Trusts§ 172 comment bat 

377 (1959). 

After a full trial concerning the accounting, the district 

court held that Weston and Cascade had not provided adequate 

explanations for their handling of the five items listed above 

totalling $629,474.63. 11 On review, we must uphold the district 

court's accounting findings unless they are clearly erroneous. 

Fed. R. Civ. P. 52(a). 

We agree with the district court that Cascade has failed to 

meet its burden of proof on four of the five accounting issues. 

Indeed, as discussed below, the evidence presented at trial showed 

that Weston regularly dipped int~ the Joint Venture's checking 

[ ••• footnote continued] 

squandered or taken from the Associates was part of the initial 

$800,000 amount that the Joint Venture had loaned to the 

Associates, and (2) the district court had nullified the Associate 

Defendants' obligation to repay that loan, thereby mooting the 

issue. 

11 Cascade's accounting was suspicious from the start. Altho~gh 

the district court ordered Cascade to provide a full accounting 

prepared according to Generally Accepted Accounting Principles (R. 

300 at 2; Accounting Tr. 168.), Cascade's accounting was not 

prepared by an accountant but by Weston himself. Although Weston 

consulted an accountant while preparing the accounting and 

enlisted an accountant to review Cascade's bookkeeping procedures 

generally, the accounting was neither audited nor certified by an 

accountant. Weston alone testified concerning the accuracy of the 

[Footnote continued .•. ] 

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account whenever one of his entities needed cash, and that he 

freely shuffled cash among his various entities with essentially 

no contemporaneous documentation. 

1. $36,943.73 depreciation expense 

In his original Affidavit Attesting Plaintiff's Fiduciary 

Accounting, Weston swore that $36,943.73 of that money was spent 

for "Depreciation." (R. 310 at 5.) The Gold Technics Defendants 

then submitted interrogatories asking how any part of the Joint 

Venture's cash possibly could have been spent on a non-cash item 

such as depreciation. In responser Weston filed an amended 

affidavit in which he allocated the $36,943.73 to two other line 

items in his accounting, $28,156 to "Other" and the remainder to 

"Offering Expense." (R. 321 at 2.) 

At the accounting trial, Westori was given the opportunity to 

explain how he had transformed $36,943.73 of "depreciation'' into 

cash expenditures and why the newly-found cash expenditures were 

not included in his original accounting. (Accounting Tr. 44-49.) 

We agree with the district court that Weston's explanations were 

inadequate. He provided no itemizat~on of the $28,156 that he 

[ ••• footnote continued] 

accounting and its compliance with Generally Accepted Accounting 

Principles. Weston admitted on cross-examination that his only 

formal training in accounting was a "class in Accounting 101 ~ •• 

at Brigham Young University." (Accounting Tr. 171.) ·At the 

accounting trial, Weston was asked whsther his one college course 

qualified him to render an opinion based upon Generally Accepted 

Accounting Principles: 

·Q. Do you feel yourself qualified to render an opinion 

based upon generally accepted accounting principles? 

A. As it applies to these records, yes, I do. 

(Accounting Tr. 171-72.) 

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allocated to "Other." (Id. at 46.) He described his increasing 

of the "Offering Expense" category as an after-the-fact 

"adjustment that I felt went to the offering expenses." (Id. at 

48.) When the district court pressed Weston on the issue of 

whether his new figure for offering expenses comported with the 

amount listed as a deduction on Cascade's 1980 tax return, Weston 

conceded that he did not know and had not checked. (Id. at 48-

49.) 

The district court properly ordered Weston and Cascade to 

repay the $36,943.73. 

2. $335,722.20 transfer to Cascade and Interphase 

In its response to defendants' various accounting 

interrogatories, Cascade submitted .its December 31, 1981 balance 

sheet showing that Cascade owed the Joint Venture $305,041.01 as 

of that date. (R. 322 Exh. "Assoc. #23.") That $305,041.01 item 

was listed on the balance sheet as a note payable from Cascade to 

the Joint Venture. 

At the accounting trial, Weston admitted that Cascade and 

other Weston entities had taken large sums from the Joint Venture 

but argued that (1) in the case of Cascade, they totalled 

$270,200.00 and not $305,041.01; and (2) they constituted capital 

distributions that need not be reimbursed. The district court 

held that=-~( 1) Cascade's debt to the Joint Venture was $305, 04l. 01 

and that Cascade had not adequately justified its contention that 

it owed only $270,200.00; (2) there was an additional $30,681.89 

(which was listed on Cascade's balance sheet as owing from 

Interphase to Cascade) that Cascade did not demonstrate came from 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 27 
6urces other than the Joint Venture; 12 and (3) Cascade's "failure 

to account for the foregoing charges on the theory of 'capital 

distributions' is an improper and self-serving attempt to avoid 

accountability for the balances [Cascade and the other Weston 

entities] owe" (Accounting Findings 22). 

On appeal, Cascade asserts, first, that the district court 

should not have relied on Cascade's corporate accounting records 

because they "were prepared for Cascade and not the [Joint 

Venture]" and because they ''were not received into evidence and 

were not a part of -the court's file." (Cascade Br. at 45.) Those 

contentions are without merit. The fact that Cascade's balance 

sheet was prepared for Cascade is not relevant to the issue of 

whether it evidences a bonafide debt owing from Cascade to the 

Joint Venture. Cascade's assertion that the documents were not 

properly before the court is belied by the record. Cascade itself 

filed the documents with the district court as an exhibit to its 

accounting responses. (R. 322 Exh. "Assoc. #23.") Weston 

testified about the documents at length during the accounting 

trial. ~, Accounting Tr. 87, 151-52. Moreover, the district 

court invited Cascade to present any clarifying evidence that it 

had, but Cascade chose not to do so. (Accounting Tr. 183-84, 305-

06.) 

Second, with regard to the $30,681~89 that th~ district court 

found owing to the Joint Venture from sums transferred between 

12 The amount shown on the balance sheet was $78,417.89. The 

district court apparently found that $47,736.00 ($78,417.89 less 

$30,681.89) was a carry forward from 1980 and thus was not 

attributable to the Joint Venture. See Accounting Tr. 90-91. 

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Interphase and Cascade, Cascade merely responds on appeal that 

"Cascade's ledger account No. 2105 'Interphase N/P' is unrelated 

to the [Joint Venture]." (Cascade Br. at 45; see also Rex Montis 

Br. at 18.) Cascade does not provide any record citation for its 

assertion that the $30,681.89 did not come from the Joint Venture. 

The record shows that Cascade caused large amounts of money to be 

transferred from the Joint Venture checking account to Cascade. 

(R. 322 at 69.) Cascade, in turn, issued numerous checks to 

Interphase in round-number denominations, such as $1000, $5000, or 

$10,000. (R. 322 at 82~83; Accounting Tr. 97.) Cascade had hired 

Interphase to handle the accounting and payroll affairs of 

Cascade, the Joint Venture, and Weston's other entities. The sums 

transferred from Cascade to Interphase were transferred either 

without any invoices being prepared at all or with invoices being 

prepared after the transaction had taken place. (Accounting Tr. 

97.) The funds were transferred into one of Interphase's bank 

accounts and commingled with the other funds there. (Id. 125.) 

It was Cascade's burden to show that all funds transferred between 

Cascade and Interphase were not related to the Joint Venture or 

else were spent on legitimate Joint Venture expenses. Cascade 

failed to do so. 13 

13 In its interrogatories to Cascade about the accounting, Gold 

Technics spec.if.ically asked Cascade to "f s] ta te the reason for 

each of these expenditures by Cascade to Interphase 'On Account.'" 

Cascade chose not to provide a detailed response. Instead, 

Cascade stated that the expenditures were "[i]n payment for 

contract services" and referred to two ledger accounts. (R. 322 

at 82-83.) Weston admitted at trial that because Interphase's 

funds were commingled with funds received from Cascade and because 

invoices often were not created until after the fact (if at all), 

there was no way to determine from the ledgers what the funds 

actually were spent for. (Accounting Tr. 108-09.) 

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Third, Cascade asserts that much of the money that Cascade 

and the other Weston entities took from the Joint Venture can be 

explained as capital distributions.- The district court found-that 

explanation to be an after-the-fact rationalization, and we agree. 

Cascade argues that in February 1981, the Joint Venture issued two 

checks totalling $40,949 to or for the benefit of Gold Technics. 

Cascade contends that the $40,949 given to Gold Technics as 10 

percent owner of the venture was a capital distribution and that, 

consequently, Telegraph Limited as 60 percent owner was entitled 

to 1270,200 and Rex Montis as 30 percent owner was entitled to 

$91,807.55. (Cascade Br. at 45-4i.J 14 

Contrary to Cascade's contention, the evidence at the 

accounting trial showed that (1) neither the 1980 nor the 1981 tax 

return for the Joint Venture, both of which were prepared by 

Cascade, reported the $40,949 payment to Gold Technics as a 

capital distribution (Accounting Tr. 56-57); (2) neither the 1980 

nor the 1981 financial statement of the Joint Venture, both of 

which were prepared by Cascade, treated the $40,949 payment as a 

capital distribution (Accounting Tr. 58-59); (3) one of the checks 

14 Cascade's capital-distribution explanation makes little sense 

on its face. First, Cascade and Interphase had no capital 

interest in the Joint Venture and thus could have no interest in 

any capital distributions. Telegraph Limited was the 60 percent 

owner of the Joint Venture, yet the transfers went not to 

Telegraph Limited but to Cascade and Interphase. Second, even if 

Cascade and Interphase (through Telegraph Limited) were entitled 

to a capital distribution, Cascade's numbers do not add up. If 

Gold Technics as 10 percent owner received $40,949 as a capital 

distribution, then Telegraph Limited as 60 percent owner would be 

entitled to six times that amount, $245,694, and not $270,200 as 

asserted by Cascade, and Rex Montis as 30 percent owner would be 

entitled to three times Gold Technics' distribution, $122,847, and 

not $91,807.55 as asserted by Cascade. 

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~volved in the $40,949 transaction indicated on its stub that 

$12,255.88 was a repayment to Gold Technics for money advanced by 

it as part of the Associates' offering (Accounting Tr. 65).; 

(4) another of the checks involved in the transaction indicated on 

its stub that the remaining $28,723.16 was a loan (Accounting Tr. 

68-69; R. 322 Exh. THV7}; and (5) Gold Technics' 1981 financial 

statement, which was prepared by Weston's accountant, treated the 

$28,723.16 as a loan (Accounting Tr. 73-74). Therefore, the 

district court was justified in concluding that Gold Technics had 

not received any capital distributions and that all money taken 

from the Joint Venture by Cascade and the other Weston entities 

should be returned. 15 

3. $81,308.40 transfer to Interphase 

In 1981, Cascade caused the Joint Venture to transfer 

$81,308.40 to Interphase in order to pay for the construction of 

Interphase's office building. (Accounting Tr. 155.) On appeal, 

Cascade's only explanation for the transfer is that it constituted 

a capital distribution, although Cascade nowhere explains how 

Interphase, which had no ownership interest in the Joint Venture, 

could ever be entitled to a capital distribution. In any event, 

for the reasons stated in Part I.C.2 above, Interphase and the 

other Weston entities were not entitled to any capital 

distributions from the Joint Venture. Because the only 

15 On appeal, Rex Montis argues that if the $28,723.16 was a loan 

to Gold Technics, then Cascade and Rex Montis were entitled to an 

offset in that amount. (Rex Montis Br. at 20.} We agree that 

Gold Technics is obligated to repay all outstanding debts owed to 

the other parties in this action, subject to any defenses that 

Gold Technics might have. The district court should address that 

issue on remand. 

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explanation offered by Interphase is not supportable, the district 

court properly ordered Cascade and Weston, w~o improperly 

authorized the transfer, and Interphase to repay the $81,308.40. 

4. $10,500 transfer to Rex Montis 

In November 1981, Cascade caused the Joint Venture to 

transfer $10,500 to Rex Montis. At trial, Weston's only 

explanation for the transfer was that it was a capital 

distribution. (Accounting Tr. 201; R. 322 at 69.) For the 

reasons stated in Part I.C.2 above, Rex Montis was not entitled to 

any capital distributions and must repay the money that it took • 

.. 

The district court properly ordered Cascade and Weston, who 

improperly authorized the transfer, and Rex Montis to return the 

$10,500. 

S. $165,000 owed for defaulted Associate interests 

The district court held that Cascade had not accounted for 

$165,000 in royalty payments that Cascade and Interphase owed to 

the Joint Venture in connection with Cascade's 1982 purchase of 

4 1/2 units of defaulted Associate interests and Interphase's 

purchase of one defaulted unit. In Cascade's responses to Gold 

Technics' accounting interrogatories, Cascade produced photocopies 

of checks and bank records showing that it indeed had paid 

$135,000 into the Joint Venture's bank account and that Interphase 

had paid $30,000. ·(R. 322 Exh. "TJV 13.") 

On appeal, the Gold Technics Defendants do not challenge 

Cascade's assertion that checks totalling $165,000 were deposited 

into the Joint Venture's bank account, but rather contend that 

Cascade failed to submit "any evidence of the source of the funds 

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.1rportedly transferred." {Gold Technics Br. at 9, emphasis in 

original.} The Gold Technics Defendants ask rhetorically, "what 

'payment' is there if $135,000 of the Associates' or [the Joint 

Venture's] funds are taken by Cascade and then checks written by 

it back into [ the Joint Venture]?" {Id.} 

Despite Gold Technics' point, we conclude that the 

$629,474.63 awarded by the district court double-counts the 

$165,000. The $165,000 payment could have come from only two 

sources: either from the Joint Venture or from non-Joint Venture 

sources {or a combination thereof). If it came from non-Joint 

Venture sources, then the Joint Venture is entitled to receive 

only $464,474.63 ($629,474.63 less $165,000) because only 

$464,474.63 was wrongfully transferred from the venture. On the 

other hand, if the $165,000 came from the Joint Venture, then the 

venture still is entitled to only $464,474.63 because $165,000 of 

the $629,474.63 taken from it was repaid. 

Therefore, because the evidence shows that Cascade and 

Interphase in fact paid $165,000 to the Joint Venture, the 

accounting award should be reduced from $629,474.63 to 

$464,474.63, and the Gold Technics Defendants should receive their 

proportionate share of the smaller sum. 

D. Corporate Veil Issues (Weston Entities' Issue No. 4) 

The district court held that Weston and the entities 

affiliated with him were alter egos of each other and were jointly 

and severally liable for the entire judgment in this case: 

Interphase, Gold Technics, Telegraph Mine, Ltd., 

Telegraph Mine Joint Venture, Cascade, Gnolaum Unitrust, 

and Rex Montis are instrumentalities of Weston which 

were and are used by Weston ·for his own personal 

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purposes. Weston disregarded the purported separateness 

of the entities and commingled the funds of the entities 

and his own. He dominated their boards of directors and 

management, and has been and is able to single-handedly 

transfer assets from one entity to another and to and 

from himself as he chooses, with the acquiescence and 

consent of all. It would be inequitable and a fraud on 

the opposing parties if any judgment against Weston, 

Cascade, or Rex Montis were not also against these alter 

ego entities. Accordingly, the judgments to be awarded 

herein for balances due, restitution, damages and costs 

and attorney fees should run not only against Cascade 

and Weston but against Interphase, Telegraph Mine 

Limited, Rex Montis and Gnolaum Unitrust. 

(Accounting Finding 35 as amended Nov. 19, 1985; emphasis added.) 

At the outset·, we need ·to distinguish between what the 

district court held regarding corporate veil issues and what it 

did not hold. 

First, as we read the district court's findings, the district 

court did not pierce the corporate veil of Cascade itself, largely 

because it had no reason to do so. 1 The district court held that 

both Cascade and its principal officer and shareholder, Weston, 

were primarily liable for breaching fiduciary duties owed to the 

Associates and to the Joint Venture. See,~' Accounting 

Findings 26-27 ("[T]he judgments to be awarded herein ••• run 

not only against Cascade and Weston, but against Interphase, 

Telegraph Mine Limited, Rex Montis and Gnolaum Unitrust") 

(emphasis added). The district court held Weston liable because 

he personally directed and participated in Cascade's fiduciary 

breaches. See Restatement Second of Torts§ 874 comment cat 300 

(1977) ("A person who knowingly assists a fiduciary in committing 

1 At the time of trial, Cascade was a publicly traded company 

having approximately 1200 shareholders. (Accounting Tr. 362.) 

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Appellate Case: 86-1202 Document: 010110166097 Date Filed: 02/16/1990 Page: 34 
a breach of trust is himself guilty of tortious conduct and is 

subject to liability for the harm thereby caused"}. 

Second, the district court held that Rex Montis and three 

other Weston entities -- Interphase, Telegraph Limited, and 

Gnolaum Unitrust -- were alter egos of Weston and were liable for 

the entire judgment against Weston and Cascade. Although the 

district court did not explain its exact reasoning, the court 

apparently adopted a variant of the "reverse piercing'' theory 

which led to the peculiar result of holding the corporation liable 

for the debts or torts of its controlling shareholder rather than 

the other way around. 2 

Here, the district court held that Rex Montis, Interphase, 

Telegraph Limited, and Gnolaum Unitrust all were liable for what 

Weston had done. Although we agree that each of those entities 

should be responsible for any wrongs that it committed and for any 

money that it took, we do not agree that those enterprises had no 

entity status separate from Weston. 

Under Utah law, two circumstances must exist before a 

corporate entity can be disregarded: 

(1) there must be such unity of interest and ownership 

that the separate personalities of the corporation and 

the individual no longer exist, viz., the corporation 

is, in fact, the alter ego of one or a few individuals; 

2 A "reverse piercing" claim is when "a corporate insider, or 

someone claiming through him, attempt[s] to pierce the corporate 

veil from within so that the corporate entity and the individual 

will be considered one and the same."} Fletcher Cyc. Corp. 

§ 41.70 at 458 (1983). Utah has addressed that theory only once, 

and it characterized that theory as "little recognized." Messick 

v. PHD Trucking Service, Inc., 678 P.2d 791, 793 (Utah 1984). The 

application here is a variant because it is not an insider who 

seeks to meld the stockholder and the corporation into one; rather 

it is an outsider who is asserting that theory. 

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and (2) the observance of the corporate form would 

sanction a fraud, promote injustice, or an inequitable 

result would follow. 

Norman v. Murray First Thrift & Loan Co., 596 P.2d 1028, 1030 

(Utah 1979). 3 

3 This case raises the issue of whether the standards for 

piercing a corporate veil should be determined by the law of the 

corporation's state of incorporation or by the law of the state 

whose substantive law applies to the case generally. Compare 17 

Fletcher Cyc. Corp. § 8326 at 120 (1987) ("[T]he liability of a 

stockholder for corporate debts and the extent and character of 

that liability are to be determined by the law of the state under 

the laws of -which the corporation was created •••• ") with 13A 

Fletcher Cyc. Corp. § 6228 at 90 (1984) ("Where a corporation is 

formed in one state for the purpose of doing business in another 

state, its stockholders will be held liable in accordance with the 

laws of the latter state in so far as business transacted there is 

concerned"). See also,~, Jefferson Pilot Broadcasting Co. v. 

Hilary & Hogan, Inc., 617 F.2d 133, 135 (5th Cir. 1980) (applying 

law of state of incorporation to corporate veil issue); RRX 

Industries v. Lab-Con, Inc., 772 F.2d 543, 545-46 (9th Cir. 1985) 

(applying law of state where contract was breached to corporate 

veil issue even though corporations were incorporated in other 

states); Restatement (Second) Conflicts§ 307 at 328 (1971) ("The 

local law of the state of incorporation will be applied to the 

existence and extent of a shareholder's liability to the 

corporation for assessments or contributions and to its creditors 

for corporate debts.") (emphasis added); id. § 297, comment cat 

291. However, because of the peculiar circumstances of this case, 

we need not resolve the general issue of what law applies to 

corporate veil questions. The four entities whose veils were 

pierced here -- Rex Montis, Interphase, Telegraph Limited, and 

Gnolaum Unitrust -- all are Utah entities. Cascade is a Nevada 

corporation but, as noted above, its corporate veil has not been 

pierced. Much of the wrongdoing in this case occurred at 

Cascade's headquarters in Utah. The only other state having 

substantial contacts with this litigation is California, where the 

mine is located and where many of the defendants resid~. However, 

none of the parties specifically argues that California law 

applies to the corporate veil issue. Moreover, California's 

standard for piercing the corporate veil does not appear to be· 

materially different from Utah's. Compare Norman v. Murray First 

Thrift & Loan Co., 596 P.2d 1028, 1030 (Utah 1979) with Automotriz 

Del Gelfo De California v. Resnick, 47 Cal. 2d 792, 306 P.2d 1, 3 

(Cal. 1957) and Institute of Veterinary Pathology, Inc. v. 

California Health Labs., Inc., 116 Cal. App. 3d 111, 119, 172 Cal. 

Rptr. 74, 78 (Cal. App. 1981). Therefore, we conclude that the 

district court properly applied Utah law to the corporate veil 

issue. 

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1. Evidence supporting piercing regarding Rex Montis, 

Interphase, Telegraph Limited and Gnolaum Unitrust 

The district court's decision to "reverse pierce" the entity 

veils of Rex Montis, Interphase, Telegraph Limited, and Gnolaum 

Unitrust was based on three key factual findings: (1) Weston 

dominated the boards of directors and the management of the four 

entities; (2) Weston was "single-handedly" able to transfer assets 

among the various entities and did so; and (3) Weston qomming~ed 

the funds of the various entities, in the sense that when he 

transferred funds from one entity to another, the funds were 

deposited in the receiving entity's general bank account and were 

mixed with other funds there. (Accounting Findings 26.) 

Having examined the record, we conclude that the district 

court's specific factual findings about how Weston operated his 

entities are justified. Weston wielded almost total control over 

the entities. That control was evidenced particularly by his 

control over each entity's finances. The record shows that Weston 

freely transferred cash from any entity that had it to any entity 

that needed it, whenever he wanted to do so. See,~, 

Accounting Tr. 290, 292, 311-12. 

There is no question that Weston's bookkeeping system 

made it nearly impossible to provide defendants with a precise 

accounting. The district court properly toncluded that, because 

the transferred funds were commingled with existing funds of the 

receiving entity, "[i]t was and is impossible to trace individual 

dollars from source to use." (Accounting Findings 9.) But the 

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issue is whether those facts constitute sufficient grounds for 

disregarding the entity status of the entities in this case. 

2. Piercing analysis 

We believe that a Utah court would not reverse pierce the 

entity veils of Rex Montis, Interphase, Telegraph Limited and 

Gnolaum Unitrust for a variety of reasons. 

First, corporate veils exist for a reason and should be 

pierced only reluctantly and cautiously. The law permits the 

incorporation of businesses for the very purpose of isolating 

liabilities among separate entities. See generally Dockstader v. 

Walker, 510 P.2d 526, 528 (Utah 1973) ("Ordinarily a corporation 

is regarded as a legal entity, separate and apart from its 

stockholders"); McCulloch Gas Transmission Co. v. Kansas-Nebraska 

Natural Gas Co., 768 F.2d 1199, 1200 (10th Cir. 1985) ("The. 

standards for the application of alter ego principles are high, 

and the imposition of liability notwithstanding the corporate 

shield is to be exercised reluctantly and cautiously.") (quoting 1 

Fletcher Cyc. Corp. § 41.10 (Rev. Vol. 1974), emphasis added); 

G. Henn & J. Alexander, Laws of Corporations§ 146 at 347 (1983) 

("limited liability is one of the principal objectives of 

incorporation"). 

Second, this case largely involves ''reverse" piercing, and it 

-is far from clear that Utah has adopted the dobtrine of "reverse" 

piercing, much less this particular variant of "reverse piercing." 

Messick v. PHD Trucking Service, 678 P.2d 791, 793 (Utah 1984) 

does discuss the "reverse pierce" concept, calling it "littlerecognized theory," but the Utah court ultimately declined to 

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~e the corporate veil there because of the failure to prove 

~e traditional piercing the corporate veil elements of 1) nonobservance of corporate formalities, 2) resulting in fraud, 

injustice or inequity. Thus, the court did not decide whether it 

would have pierced the corporate veil in the reverse context had 

those elements been present. The reverse-pierce theory presents 

many problems. It bypasses normal judgment-collection procedures, 

whereby judgment creditors attach the ~udgment debtor's shares in 

the corporation and not the corporation's assets. Moreover, to 

the extent that the corporation has other non-culpable 

shareholders, they obviously will be prejudiced if the 

corporation's assets can be attached directly. In contrast, in 

ordinary piercing cases, only the assets of the particular 

shareholder who is determined to be the corporation's alter ego 

are subject to attachment. Seel Fletcher Cyc. Corp. § 41.20 at 

413 (1988 Supp.) ("[A] necessary element of the [alter ego] theory 

is that the fraud or inequity sought to be eliminated must be that 

of the party against whom the doctrine is invoked, and such party 

must have been an actor in the course of conduct constituting the 

abuse of corporate privilege -- the doctrine cannot be applied to 

prejudice the rights of an innocent third party."). Absent a 

clear statement by the Supreme Court of Utah tha~ it has adopted 

the variant reverse piercing theory urged upon us here, we are 

inclined to conclude that more traditional theories of conversion, 

fraudulent conveyance of assets, respondeat superior and agency 

law are adequate to deal with situations where one seeks to 

recover from a corporation for the wrongful conduct committed by a 

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controlling stockholder without the necessity to invent a new 

theory of liability. 

Third,·the analysis of corporate veil issues is different in 

a consensual transaction, such as a breach of contract case, than 

in a nonconsensual transaction, such as many tort cases: 

The issues of public policy raised by tort claims bear 

little relationship to the issues raised by a contract 

claim. It is astonishing to find that this fundamental 

distinction is only dimly perceived by many courts, 

which indiscriminately cite and purport to apply tort 

precedents in contract cases and vice versa. 

Hamilton, The Corporate Entity, 49 Tex. L. Rev. 979, 984-85 

(1971). The obvious difference between consensual and 

nonconsensual transactions is that the claimants in consensual 

transactions generally have chosen the parties with whom they have 

dealt and have some ability, through personal guarantees, security 

agreements, or similar mechanisms, to protect themselves from 

loss. For example, the fact that a company is undercapitalized 

can be overcome in many contractual settings, because the parties 

can allocate the risk of financial failure as they see fit. But 

in nonconsensual cases, there is ''no element of voluntary dealing, 

and the question is whether it is reasonable for businessmen to 

transfer a risk of loss or injury to members of the general public 

througn the device of conducting business in the name of a 

corporation that may be marginally financed." Id. 

Although breaches of fiduciary duty can be analyzed using 

tort principles (see Restatement (Second) of Torts§ 874 at 300 

(1977)), the relationships among the parties in this case were 

basically voluntary and contractual. Cascade undertook the 

contractual obligation to manage the affairs of the Joint Venture 

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and of the Associates, and consequently assumed the fiduciary duty 

of loyalty and duty of care inherent in any principal-agent 

relationship. See Restatement (Second) of Agency§§ 1, 379, 387 

(1958). The upshot is that Utah courts, like courts generally, 

appear less likely to pierce a corporate veil when a consensual, 

contract-like transaction is involved than when a nonconsensual, 

tort-like transaction is involved. See,~, Centurian Corp. v. 

Fiberchem, Inc., 562 P.2d 1252, 1253 (Utah 1977) (piercing not 

allowed in sales contract dispute); Dockstader v. Walker, 510 P.2d 

526, 528 (Utah 1973) (piercing not allowed in employment contract 

dispute). 4 

Fourth, although Weston obviously used his entities to 

further his personal objectives, just as corporate parents often 

use their subsidiaries to achieve corporate goals, Weston held the 

entities out to the world as separate organizations. No one 

disputes that Weston's entities were validly organized and that 

de jure formation requirements were met. Indeed, Rex Montis was a 

publicly held company with over 850 shareholders. (Accounting Tr. 

362.) The entities filed separate tax returns. ~, Accounting 

Tr. 364-65. The entities held separate shareholder and director 

meetings. ~, Exh. 381, Notice of Rex Montis Shareholders 

4 See generally 1 Fletcher _eye. Corp. § 41.85 at 460 (1983) 

("Courts have generally be~ri more likely to disregard the 

corporate entity in tort cases than in cases of contract 

•••• "); F. Easterbrook & D. Fischel, Limited Liability and the 

Corporation, 52 U. Chi. L. Rev. 89, 112 (1985) (discussing 

economic justification for treating tort and contract cases 

differently for corporate veil purposes); Edwards v. Monogram 

Indus., 730 F.2d 977, 980-84 (5th Cir. 1984) (en bane) (discussing 

distinction between tort and contract cases for corporate veil 

purposes). 

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Meeting; Accounting Tr. 362-63. In sum, besides Weston's 

transfers of funds among his entities, the district court made no 

finding that the entities did not maintain the external incidents 

of separateness. 

Fifth, even if Weston's entities failed to comply with all of 

the formalities that they should have and even if Weston did 

freely transfer funds among the entities, the claimants here have 

not shown how their injury was connected with the entities' 

commingling or lack of formalities or how the claimants relied on 

the entities' separateness or the lack thereof. As the Utah 

corporate-veil test demonstrates, it is not enough to declare that 

two corporations or a corporation and its prime shareholder are 

not really separate. The claimant must show that recognition of 

the corporate form would "sariction a fraud, promote injustice, or 

'i 

[produce] an inequitable result. II Norman v. Murray First Thrift & 

Loan Co., 596 P.2d 1028, 1030 (Utah 1979). 

But the "injustice" or "inequity" on which a piercing claim 

is based cannot stem from the mere existence of limited liability, 

which is a legitimate characteristic of the corporate form. 

Rather, the "injustice" or "inequity" to the claimant must be 

connected with the lack of separateness between the corporation 

and its controlling stockholder and the failure to observe 

corporate formalities. Here, the defendants' losses generally had 

little to do with the Weston entities' lack of corporate 

formalities. Although there was comingling of funds among the 

various Weston entities, all the parties knew that they were 

separate entities and Weston maintained the corporate formalities 

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of each entity separate from the others. The acts of comingling 

may have been acts of conversion, breach of fiduciary duty or the 

like, but there was no misrepresentation of the corporate stature 

of the entities with whom the various investors dealt. For 

example, the evidence showed that Cascade misappropriated roughly 

$300,000 from the Joint Venture and that Rex Montis 

misappropriated about $10,000. See Part I.C above. Cascade 

plainly is ob+igated to return the $300,000 and Rex Montis must 

return the $10,000. But there is no reason to make Rex Montis 

responsible for repaying the $300,000 taken by Cascade. That 

result would be a windfall to the Joint Venture. 5 

We note that to the extent Weston or Cascade have an 

ownership interest in the entities, that interest may be 

susceptible to attachment by creditors. Thus, Cascade's 50 

percent interest in Telegraph Limited may be subject to levy. 

Likewise, Weston's 22 percent interest in his trust, Gnolaum 

Unitrust, may be reachable by his creditors. 

3. Conclusion on piercing issue 

We hold that Rex Montis, Interphase, Telegraph Limited, and 

Gnolaum Unitrust are not jointly and severally liable for 

defendants' damage award against Weston and Cascade. We affirm 

the district court's holding that Rex Montis is liable in its own 

right f.or:....:_having taken $10,500 from the Joint Venture. Likewise, 

5 Although Rex Montis is not responsible for the money that 

Cascade took from the Joint Venture, Cascade is responsible for 

the approximately $10,000 that Rex Montis took. The reason is 

that Cascade, in its capacity as manager of the Joint Venture, 

breached its fiduciary and contractual duty owed to the Joint 

Venture by wrongly authorizing the $10,000 transfer to Rex Montis. 

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we agree that Interphase is liable in its own right for having 

taken $111,990.29 ($30,681.89 plus $81,308.40) from the Joint 

Venture. On remand, the district should determine whether Rex 

Montis, Interphase, Telegraph Limited, and Gnolaum Unitrust are 

directly liable for breaching any other duties owed by them 

(provided the defendants properly raised those grounds below). 

E. Associate Defendants' Liability On Promissory Notes (Weston 

Entities' Issue No. 5) 

The district court held that although the Associate 

Defendants could not recover any of the cash that they had paid to 

the Joint Venture for royalty payments ($30,000 per l/35th unit in 

both 1980 and 1981), they were relieved of any obligation to pay 

the promissory notes that they had given to the Joint Venture as 

royalty payments ($44,285 per l/35th unit in both 1980 and 1981). 

We affirm that holding. The promissory notes given by the 

Associate Defendants were clearly given in exchange for promises 

that were materially breached. Those uncured, material breaches 

discharged the Associate Defendant's duty to render further 

performance, including payments not yet made on their promissory 

notes. Restatement (Second) Contracts§§ 232 (Illustration 4), 

237, 242 (1981)· 6 

6 Additionally, the record adequately supports the finding of 

the district court that, to the extent equitable relief was 

sought, that Cascade and the joint venture were barred by the 

doctrine of unclean hands from receiving relief pertaining to the 

collection of the royalty notes or developments notes. (Findings 

121) 

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F. Associate Defendants' Liability For Development Loan (Weston 

Entities' Issue No. 6) 

The district court held that the Associate Defendants were 

relieved of all liability for repayment of the $800,000 

development loan which the Joint Venture had made to the 

Associates from the proceeds of the working-interest sale. For 

the same reasons that we affirm the ruling discharging the 

Associate Defendant's liability on the promissory notes in Part 

l.E, we similarly affirm the ruling of the district court 

discharging the Associate Defendant's from any liability to repay 

the $800,000 development loan. 

G. Attorneys' Fees (Weston Entities' Issue No. 7) 

The district court awarded the Associate Defendants 

attorneys' fees for Cascade's bad faith in suing the Associates 

for additional cash capital contributions. Utah law expressly 

permits an award of attorneys' fees for actions not brought in 

good faith. Utah Code Ann. § 78-27-56 (allowing award of 

"reasonable attorney's fees to a prevailing party if the court 

determines that the action or defense to the action was without 

merit and not brought or asserted in good faith"). 

We do not think that the district court abused its discretion 

in awarding attorneys' fees here, and consequently, we affirm that 

ruling. 

H. Alleged Fiduciary Breach By Associate Defendants And Gold 

Technics Defendants (Weston Entities' Issue No. 8) 

The district court rejected Gnolaum Unitrust's claims that 

certain of the Associate Defendants and the Gold Technics 

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Defendants were liable to Gnolaum Unitrust for breach of fiduciary 

duty, breach of contract, breach of partnership duty, fraud, and 

tortious interference with business relationships. See Gnolaum 

Br. at 6. The district court held basically that the Associate 

Defendants had no duty to pay assessments under the Operating 

Agreement (see Part I.A above) and that the defendants had not 

engaged in any tortious conduct toward Gnolaum Unitrust or the 

other Weston affiliates. (Findings 95, 114.) 

After reviewing the record, we do not believe that the 

district court's findings on this issue are clearly erroneous. 

II. ISSUES RAISED BY ASSOCIATE DEFENDANTS 

A. Whether Working Interests Were Securities (Associate 

Defendants' Issue No. 1) 

The Associate Defendants contend that the 35 working 

interests sold by the Joint Venture were securities under the 

statutory definitions in Section 2(1) of the Securities Act of 

1933 (15 U.S.C. § 77b(l)), Section 3(a)(l0) of the Securities 

Exchange Act of 1934 (15 U.S.C. § 78c(a)(l0)·), and Section 25019 

of the California Corporations Code. 7 We agree. 

7 In 1980, when the working interests were sold, Section 2(1) of 

the Securities Act provided in pertinent part: 

The term "security" means any note, stock, treasury 

stock, bond, debenture, ••• investment contract, 

voting-trust certificate, certificate of deposit for a 

security, fractional undivided interest in oil, gas, or 

other mineral rights, or, in general, any interest or 

instrument commonly known as a "s~curity" •••• 

15 u.s.c. § 77b(l) (emphasis added). In 1980, Section 3(a)(l0) of 

the Securities Exchange Act provided in pertinent part: 

The term "security" means any note, stock, treasury 

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The district court's April 1985 ruling on this issue predated 

the Supreme Court's decision in Landreth Timber Co. v. Landreth, 

471 u~s. 681 (1985). In Landreth, the Supreme Court held that 

when an instrument falls "plainly within the statutory definition" 

of a security, "[t]here is no need. to look beyond the 

characteristics of the instrument to determine whether the 

[federal securities] Acts apply." Id. at 690. 8 

Each of the 35 units sold here consisted of "an undivided 

one-thirty-fifth (1/35} working interest in the Mining Claims." 

(Exh. 1, Attachment c, Working Interest Agreement at 1.) As such, 

each of the 35 working interests plainly constituted a "fractional 

undivided interest in ••• mineral rights" under the Securities 

Act of 1933, a "certificate of interest or participation in [a] 

• mineral royalty or lease" under the Securities Exchange Act 

stock, bond, debenture, certificate of interest or 

participation in any profit-sharing agreement or in any 

oil, gas, or other mineral royalty or lease, any 

collateral-trust certificate ••• investment contract, 

voting-trust certificate, certificate of deposit, for a 

security, or in general, any instrument commonly known 

as a "security" .••• 

15 U.S.C. § 78c(a)(l0} (emphasis added}. Calif. Corp. Code 

§ Section 25019 provides in pertinent part: 

"Security" means any ••• certificate of interest or 

participation in an oil, gas or mining title or lease or 

in payments out of production under such a title or 

lease • . . . 

8 Although the Court in Landreth dealt only with the definition 

of the term "stock," the phrase ''fractional undivided interest in 

oil, gas, or other mineral rights" and the phrase "certificate of 

interest or participation in any profit-sharing agreement or in 

any oil, gas, or other mineral royalty or lease" appear equally 

susceptible to plain meaning. 

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of 1934, and a "certificate of interest or participation in [a] 

••• mining title or lease" under the California securities 

statute. Therefore, because there is no ambiguity in the 

statutory definitions involved here and because there was no 

evidence that the 35 working interests were anything other than 

what they purported to be, we conclude that the working interests 

are "securities" under the state and federal statutes. See 

Penturelli v. Spector, Cohen, Gadon & Rosen, P.C., 779 F.2d 160, 

164-67 (3d Cir. 1985} (under Landreth analysis, "fractional 

undivided working interests" in coal mine were securities}. 9 

Consequently, we reverse the District Court's ruling that the 

Associate Defendants' interests were not securities and we remand 

the case to the district court for resolution of the Associate 

Defendants' securities claims. 10 

9 Accord Adena Exploration, Inc. v. Sylvan, 860 F.2d 1242, 1249-

50 (5th Cir. 1988). (oil and gas working interest was security}; 

Cf. U.S. Industries v. Touche Ross & Co., 854 F.2d 1223, 1233 

(10th Cir. 1988) ("Because it is undisputed that the shares . purchased by HI in the present case bear all the indicia of stock, 

we conclude that they are se·cur i ties within the meaning of the 

federal securities laws"}; Because we believe that the standards 

of Landreth are met here, we need not reach the issue of whether 

the 35 working interests also are securities because they are 

"investment contracts" under Securities and Exchange Comm. v. W.J. 

Howey Co., 328 U.S. 293 (1946). 

10 We express no opinion concerning the merits of those 

securities claims or the various defenses to them raised by Weston 

and his entities. Nor do we express an opinion as to whether the 

district court's findings concerning the Associate Defendants' 

fraud and negligent misrepresentation claims (see Part II.B below} 

affect the securities claims. We n'ote that the clear and 

convincing standard of·proof applicable to common law fraud claims 

(See Finding 85} is higher than the standard for claims under 

§ lO(b) of the Securities Exchange Act. Herman & MacLean v. 

Huddleston, 459 U.S. 375, 390 (1983} (adopting preponderance of 

the evidence standard}. 

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( 

B. Fraud or Negligent Misrepresentation (Associate Defendants' 

Issue No. 2) 

The district court held that there was no actionable fraud or 

negligent misrepresentation in the initial offering and sale of 

working interests in the mine. The Associate Defendants point to 

various facts which they assert support a finding of fraud or 

negligent misrepresentation by Weston. The district court 

concluded that those facts did not support a finding of liability 

because the alleged misstatements and nondisclosures were not 

material or they were not made with the requisite scienter or they 

were not relied upon by the Associate Defendants. See Findings 

79-97. 

The Associate Defendants have not demonstrated to us that the 

district court's findings concerning Weston's alleged fraud and 

negligent misrepresentations are clearly erroneous. Thus, we 

affirm the district court's ruling on those issues. 

c. Recovery For Adverse Tax Consequences (Associate Defendants' 

Issue 3) 

The Associate Defendants contend that the district court 

erred in failing to allow them recovery for adverse tax 

consequences allegedly caused by the misconduct of Cascade and 

Weston. In response, Cascade asserts that the Associate 

Defendants "have failed to show that any adverse tax rulings they 

received were a direct result of either fraud or breach of 

fiduciary duty." (Cascade Reply Br. at 14.) The district court 

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( 

f 

made no express findings concerning the adverse tax consequences 

allegedly suffered by the Associate Defendants. 11 

From ·the record and rulings of the district court, we are 

unable to determine the basis for the district court's denial of 

damages for adverse tax consequences. We can theorize at least 

three possible grounds for the district court's decision: (1) the 

district court may have held that damages for adverse tax 

consequences are not allowable as a matter of law; (2) the 

district court may have concluded that the Associate Defendants 

had not proved the elements of their claim for those damages, such 

as the existence of the damages or a causal connection between the 

damages and the wrongdoing of Cascade and Weston; or (3) the 

district court may have concluded that the Associate Defendants 

did not properly raise and preserve the issue in the pretrial 

order or at trial. 

On remand, the.district court should make express findings 

concerning its reason for denying the Associate Defendants' claim 

for damages stemming from adverse tax consequences. We note that 

at least one circuit court has indicated that tax consequences may 

potentially be considered in computing damages in certain 

circumstances. See Sharp v. Coopers & Lybrand, 649 F.2d 175, 189-

91 (3d Cir. 1981) (investors in tax-shelter could recover damages 

for fraud including damages associated with fraudulently promised 

11 But see Findings 114 ("Except by the foregoing findings 

otherwise indicated,. the issues of fact raised in the pleadings or 

reserved in the pretrial order are determined against the party or 

parties having the burden of proof with respect to them, the Court 

hereby finding that the evidence in support of them is 

insufficient."). 

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tax benefits), cert. denied, 455 U.S. 938 (1982), overruled on 

other grounds, In re Data Access Systems Securities Litigation, 

843 F.2d 1537, 1550 (3d Cir.) (en bane} (implicitly overruling 

Sharp on statute-of-limitations issue), cert. denied, 109 s. Ct. 

131 (1988); but cf. Randall v. Loftsgaarden, 478 U.S. 647, 666-67 

(1986). 

III. ISSUES RAISED BY GOLD TECHNICS DEFENDANTS 

A. Sale Of 30 Percent Interest To Rex Montis (Gold Technics 

Defendants' Issue No. 1) 

The Gold Technics Defendants contend that the district court 

erred in refusing to award them recision in connection with Gold 

Technics' September 1980 sale of a 30 percent interest in the mine 

lease to Rex Montis in exchange for 480,000 shares of Rex Montis 

stock. Under the Purchase Agreement, Rex Montis expressly 

agreed to convey 480,000 Rex Montis shares to Gold Technics in 

exchange for a 30 percent interest in the mine lease and Rex 

Montis' appointment as general partner of Gold Technics: 

Rex Montis agrees, subject to the warranties, conditions 

and terms of this Agreement as made by Technics and 

Technics Limited Partners, to convey to Gold Technics 

Ltd., as full consideration for the above referenced 

purchase, 480,000 shares of its common capital 

stock • • • • 

(Exh. 308, Purchase Agreement at 2.) Rex Montis further warranted 

that the "[s]hares of common stock of Rex Montis deliverable 

pursuant hereto, when issued and delivered, will be validly issued 

and outstanding shares of the common stock of Rex Montis Silver 

Company." (Id. at 3.) In addition, Rex Montis agreed that "[i]n 

the event the transaction contemplated by this Agreement or any 

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part thereof is subject to the review or approval of any 

governmental agency or department having jurisdiction in the state 

of California, or otherwise, Rex Montis agrees to bear any and all 

costs required by such review or approval." (Id. at 6.) 

Rex Montis never conveyed or delivered the 480,000 Rex Montis 

shares to Gold Technics. It did not do so in part because the 

shares were unregistered and Rex Montis could not obtain the 

California Corporations Commission's approval of the transaction 

as required by California law. See Calif. Corp. Code§§ 25110, 

25113. 

Although, this might ordinarily provide grounds for recision, 

Restatement (Second Contracts§§ 372-73 (1981), the district court 

refused to order recision here because it concluQed that Gold 

Technics was barred by doctrines of waiyer, unclean hands, and the 

failure adequately to tender back to Rex Montis the consideration 

and benefits it had received. Gold Technics failure adequately to 

exercise its recision rights under 'the California Corporation 

Code, which controlled the transfer of Rex Montis' stock. Calif. 

Corp. Code. §§ 25110, 25113, 25507. The affirmative defenses 

found by the district court bar a common law right to recision. 

We have reviewed the record and can not say that the district 

court's finding of fact with regard to these affirmative defenses 

was clearly erroneous •. Accordingly, we affirm the holding 

refusing to grant recision to Gold Technics. 12 

12 Although the California Corporation Code may prevent the 

legal transfer of the Rex Montis stock to Gold Technics, we see 

impediment to the reiief ordered by the district court that Rex 

Montis hold its stock in trust for Gold Technics. 

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B. Conversion Of 38,000 Shares Of Rex Montis Stock (Gold Technics 

Defendants' Issue No. 2) 

The-Gold Technics Defendants contend that the district court 

improperly failed to award it $18,000 in.damages against Cascade, 

Rex Montis and Weston for their conversion of 38,000 shares of Rex 

Montis stock belonging in equity to Gold Technics. The district 

court did specifically find such a conversion, Accounting 

Findings 28, and it did award damages of $18,620 against Rex 

Montis and for the benefit of Gold Technics, Ltd., apparently as a 

result of this conversion. Accounting Findings 32. Although the 

damages were not specifically mentioned again in the district 

court's conclusions of law, Accounting Conclusions of Law 6, we 

think it is clear that Gold Technics was awarded such damages. We 

remand so that the district court may also enter judgment against 

Cascade and Weston for this amount. 

c. Damages For Termination Of Joint Venture (Gold Technics 

Defendants Issue No. 3) 

The Gold Technics Defendants contend that the district court 

erred in awarding them only $5,000 for the termination of the 

Joint Venture. The Gold Technics Defendants do not· object to the 

dissolution of the Joint Venture, but argue that the district 

court improperly gave "all right, title and interest to equipment, 

and .other [Joint Venture] assets to Weston, the person responsible 

for the bad acts and collapse" of the Joint Venture. (Gold 

Technics Br. at 17.) 

It is unclear whether the district court, in awarding $5,000, 

took into account the Gold Technics Defendants' interest in the 

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mine lease and other mine assets. Accounting Findings 27. 

Although it is possible that the district court did take all of 

these matters into account when it ordered no further accounting 

between the parties, we can not be sure that it did so. 

Accounting Finding 33. 

Therefore, we vacate the district court's award of $5,000 in 

''nominal damages" and remand for a complete winding up of the 

Joint Venture. As part of the winding up on remand, the district 

court should allocate the venture's assets (which may include the 

mine lease or its proceeds) and the venture's liabilities in 

accordance with the Joint Venture Agreement and general 

partnership law. To the extent that the venturers are indebted to 

one another consistent with this.opinion, those debts should be 

accounted for as part of the winding up. 

D. Interest Of R.E. Donahey (Gold Techni6s Defendants' 

Issue No. 4) 

The Gold Techriics Defendants 9ontend that in dissolving the 

Gold Technics limited partnership and in allocating the money 

judgment among the Gold Technics Defendants, the court erred in 

failing to give any recovery to one of Gold Technics' limited 

partners, R.E. Donahey. 

The district court made no express findings as to why it 

denied recovery to Donahey. See Jan. 22, 1986 Order Amending 

Judgment. The record shows that (1) Donahey was a full-share 

limited partner of Gold Technics (Exh. 305, Partnership 

Agreement); (2) Donahey signed the September 1980 Purchase 

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Agreement with Rex Montis (Exh. 308); (3) Donahey signed a June 

14, 1982 letter requesting rescission of the Purchase Agreement 

(Exh. 375); and (4) Donahey otherwise has-participated as a party 

in the prosecution and defense of this litigation from its 

inception. On remand, the district court either should allow 

Donahey to recover on the same terms as the other limited partners 

of Gold Technics, or else should make findings explaining why 

Donahey is not so entitled. 

IV. CONCLUSION 

1. The district court's finding that the Associate 

Defendants were not obligated to pay cash assessments under the 

Joint Operating Agreement is ArFIRMED. The district court's 

judgment against Cascade and Weston and in favor of certain of the 

Associate Defendants for $70,449.68 in assessments wrongfully 

collec_ted from them is AFFIRMED. 

2. The district court's finding that Cascade and Weston 

breached their fiduciary duties owed to the Associate Defendants 

is AFFIRMED. 

3. The district court's findi~g that Cascade and Weston 

misappropriated $629,474.63 from the Joint Venture is VACATED and 

REMANDED with instructions that the district court reduce the 

amount by $165,000 to $464,474.63. Rex Montis is directly liable 

for misappropriating $10,500 of that amount. Interphase is 

directly liable for misappropriatiri~ $111,990.29 ($30,681.89 plus 

$81,308.40) of that amount. Cascade and Weston are liable for 

misappropriating the full amount, $464,474.63. 

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f 

4. The district court's finding that Rex Montis, Interphase, 

Telegraph Limited, and Gnolaum Unitrust are alter egos of Weston 

and-Cascade is REVERSED. 

5. The district court's ruling that the Associate Defendants 

should be relieved from all liability for unpaid royalty payments 

and for any unpaid payments on the promissory notes is AFFIRMED. 

6. The district court's ruling that the Associate Defendants 

should be relieved from all liability for their share of the 

$800,000 development loan is AFFIRMED. 

7. The district court's judgment against Cascade and Weston 

for $265,000 in attorneys' fees is AFFIRMED. 

8. The district court's ruling that the Associate Defendants 

and the Gold Technics Defendants did not breach any fiduciary 

duties owed to Gnolaum Unitrust or the other Weston entities and 

did not engage in other tortious conduct against Gnolaum Unitrust 

or the other Weston entities is AFFIRMED. 

9. The district court's ruling that the 35 working interests 

· in the mine lease were not securities under federal and California 

securities laws is REVERSED and REMANDED for further proceedings. 

The district court should resolve the Associate Defendants' 

securities claims on remand. 

10. The district court's ruling that Weston and his entities 

were not liable for common law fraud or negligent 

misrepresentation in the initial offering of the 35 working 

interests is AFFIRMED. 

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( 

11. The district court's ruling that the Associate 

Defendants are not entitled to recover for adverse tax 

consequences stemming 0 from the misconduct of Weston and his 

entities is VACATED and REMANDED for clarification. 

12. The district court's ruling that the Gold Technics 

Defendants are not entitled to rescission of the September 1980 

Purchase Agreement is AFFIRMED. 

13. The district court's failure to award damages in its 

conclusions of law to Gold Technics as a result of the conversion 

by Cascade, Rex Montis, and Weston of 38,000 shares of Rex Montis 

stock is REMANDED for clarification. 

14. The district court's award of $5,000 in nominal damages 

to Gold Technics for the termination of the Joint Venture is 

VACATED and the case is REMANDED for a complete winding up of the 

affairs of the Joint Venture or for clarification. 

15. The district court's ruling that R.E. Donahey is not 

entitled to participate in the recovery of the other Gold Technics 

Defendants is VACATED and REMANDED -for clarification. 

The parties make numerous arguments in their briefs that we 

have not specifically discussed in this opinion. We have tried to 

limit our discussion to the major contentions of the parties, lest 

this opinion become even longer than it is now. Nonetheless, in 

reaching our disposition, we have considered all of the parties' 

arguments, including those that we have not specifically discussed 

in this opinion and we decline to grant any other requested relief 

on appeal other than as indicated herein. 

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The judgment of the district court is AFFIRMED in part, 

REVERSED in part, and REMANDED. 13 

13 We note that this is a complicated case and the underlying 

situation may have changed since trial. We do not foreclose the 

district court from filling in gaps and doing other things 

consistent with this opinion in order to achieve a just resolution 

of the case. We also want to compliment the district court for 

its careful analysis and review of the very complex facts 

underlying the many disputes between the parties. 

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