United States Court of Appeals,

Fifth Circuit.

No. 93-1880.

7547 CORPORATION and Sonem Partners, L.P., Plaintiffs-Appellants,

v.

PARKER & PARSLEY DEVELOPMENT PARTNERS, L.P. et al., Defendants-Appellees.

Nov. 18, 1994.

Appeal from the United States District Court for the Northern District of Texas.

Before KING, JOLLY and STEWART, Circuit Judges.

KING, Circuit Judge:

The plaintiffs-appellants challenge the district court's summary adjudication of their claims

under federal and state securitieslaws and under the common law for breach offiduciary duty, waste,

and conversion, based upon its conclusion that the plaintiffslacked the requisite standing to pursue

those claims. We affirm the trial court's disposition of the state law claims and the claim for violation

offederal proxy laws, but reverse itsjudgment with respect to the remaining federalsecurities claims.

I. Background

The plaintiffs, 7547 Corporation ("7547 Corporation") and Sonem Partners, L.P. ("Sonem")

(together referred to as the "plaintiffs"), were the beneficial owners of units in a limited partnership

known as Parker & Parsley Development Partners, L.P. ("PDP"), an oil and gas master limited

partnership organized under the laws of the State of Texas and listed on the American Stock

Exchange. PDP established operations in December 1987 through the exchange of 3.9 million units

for interests in 32 oil and gas limited partnerships. As of March 30, 1990, the number of PDP units

outstanding had risen to 5.2 million. PDP was apparently managed by its sole general partner, Parker

& Parsley Development Corporation ("PPDC"), which wasin turn owed by Southmark Corporation

("Southmark"). PPDC sponsored several public development drilling partnerships from which it

received substantial management fees and operating revenues. PPDC also received promotional

interests in the partnerships in exchange for its services.
In 1989, Southmark provided severance packages to its two top officers which included the

option to acquire PPDC for the higher of book value or appraisal value by April 24, 1989. In the

event these two officers did not exercise the purchase option, nine other PPDC officers—including

the individualdefendants, Scott D. Sheffield ("Sheffield"), Herbert C. Williamson, III ("Williamson"),

and Timothy M. Dunn ("Dunn")—were granted an option to purchase PPDC within 80 days. These

officers will be referred to collectively as the "management group." The purchase option eventually

inured to the management group, but, as they were unable to obtain third-party financing for the

transaction, they could not complete the purchase. The plaintiffs claim that the individual defendants

consequentlydevised an elaborate scheme wherebytheycould effectivelyobtainthe benefits ofPPDC

ownership—i.e., a substantial portion of its income—without personally having to purchase it. The

remainder of events described below are alleged to have been conceived and precipitated by these

individuals in furtherance of the scheme, and, as noted below, we review these allegations in a light

most favorable to the non-movant plaintiffs.

A. The Stock Purchase Scheme

In May of 1989, Southmark and certain of its affiliates entered into a stock purchase

agreement (the "purchase agreement") with PDP, PPDC, and Parker & Parsley, Ltd. ("P & P Ltd.")

for the purchase of PPDC's outstanding stock. The agreement was subsequently consummated as

follows: PPDC transferred its general partnership interest in PDP to P & P Equity, which in turn was

managed by PPDC as general partner. P & P Ltd. then acquired PPDC's general partnership interest

in P & P Equity. JM Petroleum Corporation ("JM"), the sole limited partner of P & P Ltd., provided

the financing for the transaction and received in exchange a profits interest in P & P Ltd. and a $3

million liquidation preference. According to documents filed with the Securities and Exchange

Commission ("SEC"), P & P Ltd. used $2 million of the JM financing to acquire PPDC's general

partnership interest in P & P Equity, and P & P Equity in turn caused PDP to acquire all of the

outstanding stock in PPDC for an aggregate price of $52.6 million. The plaintiffs contend that the

purchase price also included the assumption of a $16.8 million debt. At the proverbial end of the day,

(i) PDP had purchased its own general partner, PPDC, (ii) P & P Equity wasthe sole general partner
of PDP, (iii) P & P Ltd was the sole general partner of P & P Equity, and (iv) Midland Management

Partners, L.P. ("Midland") was the sole managing general partner of P & P Ltd.

The plaintiffs point out that P & P Equity is a Texas limited partnership whose sole limited

partner is Spraberry Development Corporation ("SDC"), an entity owned by the individual

defendants. SDC is also a non-managing general partner of P & P Ltd. Further, the individual

defendants are general partners of Midland. The plaintiffs claim that the interrelationship between

these entities has allowed the individual defendants to gain control of PPDC and its substantial

income.

Additionally, the defendants allegedly caused PDP to engage in transactions with its affiliates

which were much less favorable to PDP than would have been received in arms-length transactions.

Specifically, on May 24, 1989, P & P Ltd. entered into a master crude oil purchase agreement (the

"crude oil agreement") with JM, its sole limited partner, which required P & P Ltd. and all of the

entities controlled by P & P Ltd. to sell all crude oil (including condensate) which any of the entities

had the right to market after the effective date of the agreement, July 1, 1989. The price agreed upon

in the crude oil agreement wasto be a monthlyweighted average price per barrel equal to JM's posted

price for crude oil of the same type and quality produced from the same field or area, plus, at P & P

Ltd.'s option, a supplemental payment of five cents per barrel or a letter of credit to secure payment.

This price is contended to be significantly below the price that could have been obtained on the open

market and has allegedly injured PDP, which sold over $5 million of oil to JM in the second half of

1989 alone and approximately 657 of the crude oil it produced in 1990.

B. The Limited Partnership Revenues

During the 1980s, PPDC sponsored several oil and gas drilling programs. By mid-1989, the

eighteenlimited partnerships organized under PPDC's eight public programs had raised approximately

$258 million of capital from subscribers. PPDC also sponsored 5 private partnerships raising

approximately $35 million in capital during the period between 1985-88. As sponsor and managing

general partner of these partnerships, PPDC received substantial management and operation fees, as

well as revenues from its promotional interests in the partnerships.
In mid-1989, PPDC and P & P Ltd. jointly offered a ninth series of public programs via a

prospectus dated August 1, 1989 (the "ninth series"). Under the joint arrangement, PPDC and P &

P Ltd. agreed to share management fees and other compensation and reimbursement. P & P Ltd. was

to contract with PPDC to perform the operating services for which PPDC would be reimbursed at

cost—i.e., less than 507 of the total compensation and reimbursement. Liabilities for organization

and offering expenses exceeding two and one-half percent of aggregate initial partner contributions

were allocated entirely to PPDC. The plaintiffs argue that P & P Ltd. will receive tens of millions of

dollars in management fees and other compensation, even though the management and operating

services will in actuality be performed by PPDC employees.

C. The Roll-Up Scheme

The plaintiffs complain of the proposed transaction whereby t he assets, liabilities, and

operations of PDP, P & P Ltd., and Damson Oil Corporation and its affiliates ("Damson") were to

be combined into a newly-formed corporation, Parker & Parsley Petroleum Company ("P & P

Petroleum"), inexchange forstock in the new corporation (the "roll-up transaction" or "transaction").

Under this plan, the Parker & Parsley entities were then to be liquidated in accordance with their

respect ive partnership agreements and the P & P Petroleum stock distributed to the former

unitholders of the "rolled-up" partnerships who relinquished their partnership interests. The

agreements necessary to effect the transaction—the amended and restated exchange agreement

entered into by PDP, P & P Equity, PDP Ltd., Midland, and others (the "exchange agreement") and

the plan of consolidation respecting the Parker & Parsley partnerships (the "P & P plan")—were

executed in December 1990. Because the transaction required approval by PDP's limited partners,

the general partner of PDP solicited their votes on, and recommended approval of, the transaction

through a Prospectus/Proxy Statement dated December 31, 1990. The Prospectus/Proxy Statement

also delineated the terms of the offering of P & P Petroleum stock.

The parties intended that P & P Petroleum would continue the partnerships' activities of

sponsoring public and private oil and gas development drilling and income programs after the roll-up

transaction was consummated.
1. Distribution of P & P Petroleum common stock

The Prospectus/Proxy Statement provided that "[e]ach holder of PDP units will receive 2

shares of [P &PPetroleum] Common Stock for each PDP unit[owned] " (emphasisin original), and

that P & P Ltd. would receive 2.3 million shares of the common stock (assuming 1007 participation)

and 1.9 million shares of the common stock (if only the P & P partnerships participated).

The plaintiffs contend that the allocation of stock in the new corporation is unfair to them.

Specifically, they claim that P & P Ltd. will receive a disproportionately higher percentage of P & P

Petroleum common stock than it would have received in an arms-length transaction—at the expense

of PDP. Consequently, when the respective companies are liquidated and the P & P Petroleum stock

distributed, the plaintiffs will receive far less than that to which they would have been entitled if the

transaction were handled without any conflicts of interest or self-dealing.

The plaintiffs take issue with several of the justifications given for the allocation scheme

which, in their view, will have the inequitable and inevitable result that the value of the P & P

Petroleum common stock to be received by PDP unitholders is substantially less than the per-unit

liquidation value of PDP. First, in calculating the number of shares of P & P Petroleum to be

allocated to the PDP unitholders, PDP's oil and gas reserves were valued as of December 31, 1989,

whereas in calculating the number ofshares to be allocated to P & P Ltd., the P & P Ltd. oil and gas

reserves were valued as of September 30, 1990. This difference as to valuation dates is claimed to

have affected the estimates profoundly because the invasion of Kuwait by Iraq in August of 1990

precipitated a significant rise in the price of oil globally. According to the plaintiffs, the price of oil

in effect as of September 30, 1990, was $38.25 per barrel, while the price in effect as of December

31, 1989, was only $20.50 per barrel. Consequently, if the estimation of P & P Ltd.'s reserves had

been made as of December 31, 1989, the reserves would have been worth approximately half of what

they were worth in September of 1990.

Another asserted contributing factor to the disparity in the proposed stock allocations is the

fact that the management fees, operating fees, and other revenues from the ninth series

partnerships—which are claimed to have been misappropriated by P & P Ltd. from PDP in the first
place—were taken into account in determining the value of P & P Ltd. and the corresponding number

ofshares allocated to P & P Ltd. In other words, the plaintiffs contend that P & P Ltd. compounded

its evil in misappropriating PDP's management fees, operating fees, and other substantial revenues

by using those assets to justify allocating to P & P Ltd. a considerably greater portion of the P & P

Petroleum common stock pursuant to the proposed roll-up transaction.

Finally, the plaintiffs argue that the P & P proposal inequitably allocates allfees and expenses

incurred by the Parker & Parsley partnerships as a result of the roll-up to PDP alone. These factors,

individually and in the aggregate, are claimed to affect disproportionately the number of shares

allocated to PDP unitholders.

2. The Prospectus/Proxy Statement

Because the P & P plan includes a proposed amendment to the PDP partnership agreement,

the general partner of PDP solicited proxiesfrom itslimited partnersto be voted at a special meeting

which was scheduled to take place on February 19, 1991. The plaintiffs claim that the

Prospectus/Proxy Statement was materially false and misleading, and that these deficienciessimilarly

tainted the registration statement which contained the Prospectus/ProxyStatement and wasfiled with

the SEC. Specifically, the section of the Prospectus/Proxy Statement which discussed in detail the

allocation of P & P Petroleum shares to be apportioned to PDP and P & P Ltd. (the "allocation

section") describes six categories of factors and assumptions determined by P & P Ltd., with the

assistance ofDeanWitter, to bematerialto the respective valuations ofthese partnerships, concluding

that:

[t]aking into consideration all the terms of the Transaction and other relevant factors, P & P

Ltd. determined that the shares of [P & P Petrol eum] Common Stock to be issued to the

Parker & Parsley partnerships pursuant to the Transaction should be allocated 81.847 to the

holders of PDP Units and 18.167 to P & P Ltd. (in the case of 1007 Participation) and 84.57

to the holders of PDP Units and 15.57 to P & P Ltd. (in the case of P & P Only

Participation).

The Prospectus/Proxy Statement, however, does not disclose exactly how the stock allocation was

determined. According to the plaintiffs, the Prospectus/Proxy Statement failed to make adequate

disclosure about numerous points of interest to the investors, including (i) other potential

methodologies for valuation, (ii) comparable valuations with similar companies, (iii) the
 

1Specifically, the plaintiffs point to a portion of the Prospectus/Proxy Statement which

discusses certain benefits of the roll-up transaction to PDP unitholders. They complain that these

statements were materially false and misleading in that they failed to disclose adequately the

operations costs of P & P Petroleum, as well as substantial transaction costs (to be borne by PDP)

which would appear to offset any such cost reductions. 

disproportionate burden of costs of the roll-up transaction which were to be borne by PDP,1(iv)

changes in the asset value of PDP between December 31, 1989, and September 30, 1990, and the

resulting effect upon PDP's valuation for the allocation scheme, (v) the SEC-10 value of P & P Ltd.'s

oil and gas reserves as of December 31, 1989, (vi) the liquidation value of PDP and the benefits of

a corporate conversion of PDP alone to PDP's investors, and (vii) the full extent of the relationship

between Dean Witter and the defendants. In light of these and other omissions and

misrepresentations, as well asthe valuation problems discussed above, the plaintiffsmaintain that the

Prospectus/Proxy Statement was materially misleading in representing that the aggregate

consideration to be received by the Parker & Parsley partnerships was the "fair market value" of the

assets of those partnerships.

3. The 1990 Repurchase Plan

In the first three quarters of 1990, PPDC purchased 5.67 of the total PDP units issued in

December of 1989, some of which were acquired on the open market, thus making PPDC a 10.27

owner of its parent corporation. The plaintiffs characterize the holdings as being in PDP's treasury

since they were held by PDP's wholly-owned subsidiary and assert that the reacquisition of PDP's

units, which not surprisingly were voted in favor of the proxy proposal, substantially lessened the

number of minority unitholders necessary to approve the Parker & Parsley plan. The plaintiffs argue

that the purpose of these acquisitions should have been disclosed to them earlier on.

D. The Instant Litigation

On September 6, 1990, Kaufmann filed this derivative action on behalf of PDP against P &

P Equity, P & P Ltd., Midland, and the individual defendants. PDP was included as a nominal

defendant. After the defendants filed a registration statement with the SEC on December 31, 1990,

regarding the proposed roll-up transaction and disseminated the Prospectus/Proxy Statement to PDP
 

2

7547 Corporation was assigned 100 PDP units by Kaufmann Alsberg & Co., Inc.

("Kaufmann") on December 17, 1990. 

 

3Sonem purchased its PDP units on July 23, 1990. 

unitholders, Kaufmann's assignee, 7547 Corporation,2and Sonem3filed an Amended Derivative and

Class Action Complaint (the "amended complaint") on January 16, 1991, alleging derivative and

direct claims under Texas law and federal claims under the Securities Act of 1933, 15 U.S.C. § 77a

et seq. (the "Securities Act") and the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (the

"Exchange Act").

The defendants moved to dismiss, or alternatively for summary judgment on, the amended

complaint on the basis that the plaintiffs lacked standing to assert any of the claims described in it.

An amended motion to dismiss and second amended motion to dismiss were later filed. The plaintiffs

responded to these motions and filed two motions for class cert ification, both of which were

ultimately denied as moot. After brief discovery relating to the issues of standing, the district court

construed the defendants' amended motion to dismiss as one for summary judgment and granted it

by order entered September 2, 1993. This appeal followed.

II. Analysis

Standing issues abound in this case. The defendants have raised numerous challenges to the

plaintiffs'standing to bring the claims asserted, including: (i) the inability to bring state law derivative

claims because the plaintiffs were never admitted aslimited partners; (ii) a lack of standing under the

federal securities laws because the plaintiffs were neither "purchasers" nor "sellers" of the unit

interests; (iii) the failure to show injury from any alleged deceptive activities; and (iv) an inability

to assert violations of the federal securities laws governing the solicitation of proxies because the

plaintiffs were not eligible to vote. These st anding issues are obviously quite complicated and

permeate all of the plaintiffs' causes of action; however, as the district court properly determined,

their resolution is jurisdictional and therefore critical to our assessment of the case. See Lujan v.

Defenders of Wildlife, --- U.S. ----, ----, 112 S.Ct. 2130, 2136, 119 L.Ed.2d 351 (1992)

(characterizing standing as a "core component" ofthe case-or-controversyrequirement ofArticle III);
 

4The relevant partnership agreement is the Second Amended and Restated Agreement of

Limited Partnership of Parker & Parsley Development Partners, L.P., effective as of September 1,

1989 (the "partnership agreement"). 

Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 117 (2d Cir.1991) ("Because standing is

jurisdictional under Article III ..., it is a threshold issue in all cases since putative plaintiffs lacking

standing are not entitled to have their claims litigated in federal court.").

A. The Status of the Plaintiffs Under Texas Law

1. Derivative claims

The defendants argued below, and the district court agreed, that the plaintiffs had never been

made limited partners of PDP and thus did not have standing under Texas law to assert derivative

claims on behalf of the partnership. In the lower court's view, 7547 Corporation and Sonem, as

assignees of limited partnership units, did not become "Substituted Limited Partners" as that term is

defined in the PDP partnership agreement.4

The Texas Revised Uniform Limited Partnership Act permits a limited partner to bring a

derivative action on behalf of a limited partnership, provided, among other things, that the plaintiff

was a limited partner both at the time he brings the action and at the time of the transaction (or at

least "had status as a limited partner aris[ing] by operation of law or under the terms of the

partnership agreement from a person who was a limited partner at the time of the transaction").

TEX.REV.CIV.STAT.ANN. ART. 6132a-1, §§ 10.01, 10.02 (Vernon Supp.1994). The statute defines

"limited part ner" quite deferentially by reference to the operative partnership agreement. E.g.,

TEX.REV.CIV.STAT.ANN. ART. 6132a-1, §§ 1.02(5), 3.01 & 7.04. A transferee of partnership

interests can become a "limited partner":

if and to the extent that:

(1) the partnership agreement provides; or

(2) all partners consent.

TEX.REV.CIV.STAT.ANN. ART. 6132a-1, § 7.04.

The PDP partnership agreement sets forth the procedure by which a transferee of limited

partnership units can become a limited partner. First, the transferee must receive the units and the
power to seek admission from its assignor. It must then deliver an executed transfer application to

the transfer agent which includes certain requisite representations and agreements. Finally, the

general partner must consent to the admission of the transferee as a "Substituted Limited Partner."

That consent "may be granted or withheld in [the general partner's] sole discretion." However, the

agreement also providesthat consent may be "deemed" to have been given ifthe general partner does

not expressly withhold its consent. It is undisputed that the general partner of PDP, P & P Equity,

never gave its consent to the admission of Kaufmann, 7547 Corporation, or Sonem. In fact, in all

three cases, it specifically withheld such consent. By letter dated September 14, 1990, P & P Equity

expressly denied Kaufmann consent to be a limited partner. That "blackball" specifically extended

to its affiliates and assignees, apparently including 7547 Corporation, which subsequently acquired

its units from Kaufmann on December 17, 1990. Since the notice was delivered several months

before Kaufmann assigned its units to 7547 Corporation, 7547 Corporation could not have become

a limited partner even under the "deemed consent" provision. Moreover, the plaintiffs admit by

affidavit that they never filed applications to be admitted as limited partners.

The plaintiffs offer several ways around their obvious problems with standing to sue

derivatively. First, they contend that they should be treated effectively as limited partners for

purposes ofstanding. Second, they complain that summary judgment was prematurely granted before

they could obtain sufficient evidence to establish theirstanding to sue. Finally, they contend that they

are entitled to assert direct claims against the general partner and other defendants. We address each

in turn.

a. Equitable status as limited partners

With regard to the first argument, the plaintiffsmaintain that "standing may be granted to one

who is not a limited partner where, inter alia, the wrongdoersthemselves prevented the person from

becoming a limited partner in order to continue in their wrongdoing without challenge." While

admittedly appealing, the plaintiffs cannot cite to any authority to support this novel theory that they

"should" be granted standing as limited partners as a matter of Texas law. Although the plaintiffs'

allegations, if true, may amount to egregious tale of mismanagement and/or deception, for several
 

5The failure to include other interest-holders as persons eligible to sue derivatively cannot be

viewed as accidental; other sections affording rights to limited partners expressly include an

"assignee of a partnership interest." E.g., TEX.REV.CIV.STAT.ANN. ART. 6132a-1, § 1.07(d)

(Vernon 1994) (right to inspect financial records of the company); id. at § 1.07(e) (right to obtain

without charge copies of the partnership agreement, certificate of limited partnership, and tax

returns). 

 

6Accord TEX.REV.CIV.STAT.ANN. ART. 6132a-1, § 7.04 comment (observing that "[i]f the

agreement allows assignees automatically to become limited partners, the free transferability of

interests may imperil federal income tax classification as a partnership."). 

reasons we are not persuaded that we should alter the clear language of the Texas statute to afford

standing to the plaintiffs. First, the Texas statute bestows eligibility to sue derivatively only upon one

who is a "limited partner," which status, as discussed above, is essentially defined by the partnership

agreement. TEX.REV.CIV.STAT.ANN. ART. 6132a-1, § 10.01. Section 10.02 makes it even clearer

that the derivative plaintiff must be a "limited partner " at the time of bringing the action. Id. at §

10.025 Further, the Texas statute reflects that there are significant, attendant legal consequences to

becoming a limited partner which do not affect other interest-holders. See TEX.REV.CIV.STAT.ANN.

ART. 6132a-1, § 7.02(b) (stating that an assignee of partnership interests who has not yet become a

limited partner has no liability as a partner); id. at § 6.03 (setting forth the procedure by which a

limited partner must withdraw from the partnership). Indeed, there are indications throughout the

statute that the distinction between limited partners and mere assignees is critical to the statutory

scheme. Id. at § 7.02 comment ("Assignability does not amount to free transferability of interest

which might imperil partnership classification for federal income tax purposes; this is because the

assignee does not automatically become a limited partner.... The section also prevents an assignee

from becoming a partner, or exercising the rights of a partner, unlessthe agreement is otherwise.").6

We can only conclude that the Texas legislature specifically determined not to include assignees and

transferees among those with derivative standing and instead deliberatelychose to allow a partnership

agreement to define the persons upon whom standing to sue derivatively would be conferred. E.g.,

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 734, 95 S.Ct. 1917, 1925, 44 L.Ed.2d 539

(1975) (Where legislative body expressly includes a term in one provision of law but not in another

part of the same law, it is permissible to conclude that it omitted the term intentionally.). We cannot
 

7E.g., Hurt v. Cotton States Fertilizer Co., 145 F.2d 293, 295 (5th Cir.1944) (finding that

legatee of stock had sufficient equitable interest to warrant standing to sue derivatively), cert.

denied, 324 U.S. 844, 65 S.Ct. 679, 89 L.Ed. 1406 (1945); HFG Co. v. Pioneer Pub. Co., 162

F.2d 536, 540-41 (7th Cir.1947) (holding that beneficial owner of stock who was not a

shareholder of record had standing to assert derivative claims on behalf of corporation); 

override what we see to be the clear intent ofthe Texasstatute in order to afford "equitable" standing

to the plaintiffs in this case.

Further, our decision in Griffin v. Box, 910 F.2d 255 (5th Cir.1990), represents a serious

impediment to the loose construction of the statute urged by the plaintiffs. In Griffin, the plaintiffs,

who were transferees of certain depositary receipts evidencing ownership in the OKC Limited

Partnership, were dissatisfied with the general partners' performance and began soliciting consents

from other receipt holders to replace the general partners pursuant to a partnership agreement

provision that allowed "limited partners" to take certain actions by written consents. Id. Despite the

general partners' efforts to block the voting, the plaintiffs obtained over fifty percent of the

outstanding votes and filed documents with the Texas Secretary of State to amend the partnership

agreement in accordance with the vote. Id. at 258. The general partners sought injunctive relief to

restrain the plaintiffsfrom interfering with management, which was granted upon the district court's

finding that the receipt holders were no t "limited partners" as defined under Texas law and the

partnership agreement because the general partners had never given consent to their admission as

limited partners. Id. at 258-59. This court affirmed, concluding that the partnership agreement

requiring consent by the general partners was "clear and unequivocal" and, when read together with

the provision bestowing complete discretion upon the general partners in this regard, "makes clear

that ... no absolute right to the status of substituted limited partner exists." Id. at 260-61. Griffin

confirms that one seeking to assert the rights of a limited partner must establish compliance with the

partnership agreement's admission procedures and that the agreement controlsthe qualifications and

rights of limited partners. Id. at 263.

The plaintiffs nonetheless draw our attention to cases which have permitted persons who are

not technically "shareholders" to assert claims on behalf of a corporation and request that we extend

their holdings by analogy.7 The problem with doing so is that those cases do not construe the Texas
Gustafson v. Gustafson, 47 Wash.App. 272, 734 P.2d 949, 953 (1987) (same). 

 

8E.g., Allright Mo., Inc. v. Billeter, 829 F.2d 631, 635-36 (8th Cir.1987); Jaffe v. Harris, 109

Mich.App. 786, 312 N.W.2d 381, 384-85 (1981); Riviera Cong. Assocs. v. Yassky, 18 N.Y.2d

540, 277 N.Y.S.2d 386, 390-93, 223 N.E.2d 876, 879-80 (1966). 

 

9

Indeed, according to the Bar Committee comments on sections 10.01 and 10.02, the very

purpose of the legislative action was to confer standing upon limited partners akin to that given to

shareholders. TEX.REV.CIV.STAT.ANN. ART. 6132a-1, article 10 comment. The comments also

reflect that "Texas courts [had] not previously considered whether partners have a right to sue

derivatively...." Id. The fact that this statute was the first expression of any right to sue

derivatively on behalf of a limited partnership further counsels against extending the privilege

beyond the plain words of the law to reach other interest-holders. 

law with which we are concerned. Griffin, on the other hand, does. For similar reasons, the cases

which granted a right to limited partnersto sue on behalf ofthe partnership even before such standing

was conferred by statute8 do not persuade us to bypass the clear language of the Texas statute.9 In

short, we disagree with the plaintiffsthat "[t]here is no good reason why [they]should not be allowed

to stand in the place of the limited partner or partners whose interests" were ultimately transferred

to them.

b. The request for more time

The plaintiffs' next theory, more fully developed at oral argument, was that the district court

prematurely granted summary judgment without affording them additional time in which to obtain

the necessary documentsto support theirstanding. For example, the plaintiffs argue for the first time

on appeal that they have recently uncovered a blanket consent to the admission of all unitholders as

limited partners—except for Kaufmann—which was to be effective as of December 26, 1990 (the

date fixed for determination of the record limited partners entitled to vote on the roll-up). In their

view, this document would have substantiated their status as "substitute limited partners" with

standing to sue. The plaintiffs admit that this document was not part of the record before the district

court; accordingly, we may not consider it as a basis for reversing the district court's summary

judgment. Topalian v. Ehrman, 954 F.2d 1125, 1131-32 n. 10 (5th Cir.) ("In reviewing a grant of

summary judgment to determine whether the law was applied correctly, this court only considers

papers that were before the trial court."), cert. denied, --- U.S. ----, 113 S.Ct. 82, 121 L.Ed.2d 46

(1992).
 

10Rule 56(f) provides as follows:

Should it appear from the affidavits of a party opposing the motion that the party

cannot for reasons stated present by affidavit facts essential to justify the party's

opposition, the court may refuse the application for judgment or may order a

continuance to permit affidavits to be obtained or depositions to be taken or

discovery to be had or may make such other order as is just.

FED.R.CIV.P. 56(f). 

To the extent that they argue that the documentsupposedlyexemplifiesthe fact thatsummary

judgment should have been deferred pending more discovery, that argument also fails. The proper

proceduralmechanismfor obtaining a continuance of a summary judgment motion in order to pursue

discovery to respond is set forth in Federal Rule of Civil Procedure 56(f).10 The cases interpreting

the rule elaborate three general requirements with which the non-movant must comply before

obtaining a continuance: (i) a request for extended discovery prior to the district court's ruling on

the summary judgment; (ii) a notice to the court that further discovery pertaining to the summary

judgment motion is being sought; and (iii) an explanation as to specifically how the requested

discovery pertainsto the pending motion. Wichita Falls Office Assocs. v. Banc One Corp., 978 F.2d

915, 919 (5th Cir.1992) (citation omitted), cert. denied, --- U.S. ----, 113 S.Ct. 2340, 124 L.Ed.2d

251 (1993). We are not directed to any portion of the record—nor have we found any

independently—in which the plaintiffs made the requisite representations or even requested a

continuance ofthe summaryjudgment motion pending further discovery, other than requestsfor brief

extensions whichwere granted by the court below. Accordingly, we cannot say that the district court

erred in granting summary judgment prematurely.

2. Direct claims

The plaintiffs alternatively argue that the "near total domination and influence" of P & P

Equity over the operations and assets of PDP required them to repose trust and confidence in the

general partner; thus, they reason, the breach of that trust affords them a direct action against the

general partner. See Texas Bank & Trust Co. v. Moore, 595 S.W.2d 502, 507-09 (Tex.1980)

(holding that a fiduciary relationship exists where " "a special confidence is reposed in another who

in equity and good conscience is bound to act in good faith and with due regard to the interests of
the one reposing confidence.' " (citations omitted)). The reference to Texas law is appropriate

because this court has previously held that state law determines whether a shareholder may maintain

a non-derivative action. See Crocker v. FDIC, 826 F.2d 347, 349 (5th Cir.1987), cert. denied, 485

U.S. 905, 108 S.Ct. 1075, 99 L.Ed.2d 235 (1988). We have no trouble in extending Crocker to the

case presented, and conclude that state law is also appropriate to determine whether an action against

the general partners of a limited partnership is derivative or direct.

We have not been pointed to, nor have we uncovered, any Texas cases dealing with the

specific issue presented, namely, whether a unitholder or limited partner can sue directly for injuries

suffered by the limited partnership. As the defendants point out, the problem with using general

fiduciary duty cases to find a direct cause of action in this case is that the injury here was in essence

suffered by the partnership. The cases are legion that a shareholder may not sue directly for breaches

of duties by officers and directors of a company because those injuries are actually suffered by the

corporation. E.g., Wingate v. Hajdik, 795 S.W.2d 717, 719 (Tex.1990); see also Lewis v. Knutson,

699 F.2d 230, 237-38 (5th Cir.1983); cf. Abeloff v. Barth, 119 F.R.D. 332, 334 (D.Mass.1988)

(claims for breaches of duty by general partner of limited partnership belong to the entity, not to the

partners). The principle underlying this theory is that, when an injury is suffered by the corporation,

each shareholder suffers relatively in proportion to the number of shares he owns, and each

will be made whole if the corporation obtains restitution or compensation from the

wrongdoer.... Such action must be brought by the corporation ... in order that the damages

so recovered may be available for the payment of the corporation's creditors, and for

proportional distributions to the stockholders....

Wingate, 795 S.W.2d at 719 (quoting Massachusetts v. Davis, 140 Tex. 398, 168 S.W.2d 216, 221

(1942), cert. denied, 320 U.S. 210, 63 S.Ct. 1447, 87 L.Ed. 1848 (1943)); cf. Gabrielsen v.

BancTexas Group, Inc., 675 F.Supp. 367, 373 (N.D.Tex.1987) (observing that, where the entity

suffers injury because of the alleged misconduct of its management, the holder of an interest has no

standing to bring a direct civil action against the management).

This same principle has been applied to require derivative action where an injury is in reality

suffered by a limited partnership. See Attick v. Valeria Assocs., L.P., 835 F.Supp. 103, 110-11

(S.D.N.Y.1992); Strain v. Seven Hills Assocs., 75 A.D.2d 360, 429 N.Y.S.2d 424, 432 (1980) ("[A]
limited partner's power to vindicate a wrong done to the limited partnership and to enforce redress

for the loss or diminution in value of his interest is no greater than that of a shareholder of a

corporation."); Abeloff, 119 F.R.D. at 334. We find the reasoning of these authorities instructive

and predict that a Texas court would likely consider the state law claims presented to be derivative.

Indeed, the fact that Texas now has a statute expressly allowing limited partners to sue derivatively

on behalf of the partnership—and thus making their status more equivalent to that of a

shareholder—leads usto believe that a Texas court would likely be hesitant to allow a limited partner

(much less a unitholder) to sue directly for wrongs suffered in reality by the partnership.

Moreover, the facts ofthis case present an evenmore forceful argument for finding derivative

harm only. The plaintiffs describe their damages as follows:

[The defendants] have engaged in a complex and sophisticated scheme and common course

of conduct to wrongfullymisappropriate for themselves millions of dollarsin fees, properties,

and interests rightfully belonging to PDP and 28,000 PDP Unitholders.

They also contend that, pursuant to the roll-up transaction:

[T]he common stock of [PDP Petroleum] will be unfairly allocated between PDP and P & P

Ltd. with P & P Ltd. receiving a far greater percentage of the common stock than it would

have received in an arm's length transaction.

The injuries alleged by the plaintiffs are therefore collective injuriessuffered by the partnership. That

the disparities will eventually be passed on to the PDP unitholders upon liquidation of PDP does not

commute the causes of action into direct claims on the plaintiffs' behalf; rather, the damages sought

by the plaintiffs appear to be exactly like those indirect damages suffered by shareholders when a

wrong is perpetrated upon the corporation. E.g., Wingate, 795 S.W.2d at 719; see generally, Leach

v. FDIC, 860 F.2d 1266, 1269 (5th Cir.1988), cert. denied, 491 U.S. 905, 109 S.Ct. 3186, 105

L.Ed.2d 695 (1989); FDIC v. Howse, 802 F.Supp. 1554, 1561-62 (S.D.Tex.1992) (determination

of whether claim is derivative turns on whether "all shareholders are "wounded' or just one person

has been hurt by the misconduct.").

The plaintiffs point usto two casesin which they claim a fiduciary dutywasfound to be owed

by the general partner to a unitholder or limited partner. See Kellis v. Ring, 92 Cal.App.3d 854, 155

Cal.Rptr. 297 (1979); Eisenbaum v. Western Energy Resources, Inc., 218 Cal.App.3d 314, 267
 

11In Eisenbaum, the California plaintiff alleged that the defendant's predecessor, who was

formerly a general partner of the limited partnership at issue, sold him interests in a Colorado

limited partnership without disclosing that the sale had not been qualified under California law. 

Eisenbaum v. Western Energy Resources, Inc., 218 Cal.App.3d 314, 267 Cal.Rptr. 5, 7-8 (1990). 

Cal.Rptr. 5 (1990). These cases do not persuade us to permit a direct action here. Eisenbaum

involved the breach of a duty owed directly to the limited partner, which has never been subject to

the derivative action rule.11 See Wingate, 795 S.W.2d at 719 (stating that the rule requiring derivative

action for corporate injuries does not prohibit a stockholder from recovering damages where

wrongdoer violates duty to stockholder individually); Schoellkopf v. Pledger, 739 S.W.2d 914, 918-

19 (Tex.App.—Dallas 1987) (recognizing thatstockholdermaysue for violationofhis ownindividual

rights even though corporation may also have a claim), rev'd on other grounds, 762 S.W.2d 145

(Tex.1988); Howse, 802 F.Supp. at 1562; cf. Crocker, 826 F.2d at 349-50 (applying analogous

Mississippirule). With respect to Kellis, the California court merely speculated that "[i]t may be that

upon proper pleading" the assignee co uld possibly maintain an action for injunctive relief and

damages. 155 Cal.Rptr. at 300 (emphasis added). The court did not determine whether this possible

action need be brought derivatively or directly. The dicta in Kellis does not compel usto find a direct

action here.

In conclusion, we believe that the plaintiffs' state law causes of action are properly

characterized as derivative, and our finding that Texas law does not permit the plaintiffs to bring

derivative actions precludes the assertion of these claims.

B. Federal Securities Claims

The district court did not examine the federal securities claims individually—except for the

asserted violations of the proxy rules—but rather disposed ofthemin its conclusion that the plaintiffs

were not limited partners. We find that the tests for standing under these securities provisions do not

overlap with the test for standing under Texas law and evaluate each claim separately below.

1. Section 11(a): registration liability

The record does not specifically reflect that the roll-up transaction was consummated or that

the plaintiffs actually received stock in P & P Petroleum as a result; however, the parties appear to
 

12Indeed, it is the defendants who point out in their briefs before this court that "there is no

evidence in the Record to suggest that Sonem and 7547 [Corporation] do not continue to own

stock in [P & P Petroleum]." 

 

13Specifically, section 11(a) provides as follows:

In case any part of the registration statement, when such part became effective,

contained an untrue statement of a material fact or omitted to state a material fact

required to be stated therein or necessary to make the statements therein not

misleading, any person acquiring such security ... [may] sue [1] every person

who signed the registration statement; [and] [2] every person who was a director

of or partner in the issuer at the time of filing....

15 U.S.C. § 77k(a) (emphasis added). 

operate upon this understanding.12 The district court assumed for purposes of its decision that the

transaction did occur, and we will therefore do the same—without prejudice, of course, to the

defendants' ability to demonstrate to the court below on remand that the plaintiffs did not acquire

shares of P & P Petroleum or otherwise lack standing to assert these claims. We review only the

district court's holding that the plaintiffsdid not have standing to sue undersection 11(a) because they

were not limited partners.

 Thus operating on the presumption that the former PDP unitholders are now stockholders

of P & P Petroleum, we look to see whether they have standing to assert claims under section 11 of

the Securities Act, 15 U.S.C. § 77k(a), which creates liability for the issuance of registration

statements containing false material facts or omissions of material facts.13 The defendants maintain

that "[o]nly persons who actually purchase shares pursuant to a defective registration statement have

standing to file under Section 11," and reason that the plaintiffs fail to fit within this requirement.

The liability provision at issue permits "any person acquiring" a security issued pursuant to

a defective registration statement to sue in law or in equity a variety of defendants. 15 U.S.C. §

77k(a). Case-law has limited the term "any person acquiring such security" to purchasers of shares

issued and sold pursuant to the challenged registration statement. E.g., Blue Chip Stamps, 421 U.S.

at 735-36, 95 S.Ct. at 1925 (observing that sections 11(a) and 12 of the Securities Act "are by their

terms expresslylimited to purchasers and sellers ofsecurities"); Klein v. Computer Devices, Inc., 591

F.Supp. 270, 273 (S.D.N.Y.1984), clarified on reh'g, 602 F.Supp. 837 (S.D.N.Y.1985). Thus, we
 

14The only exception to this rule is where the transaction is solely for the purpose of changing

the issuer's domicile, see Sec. Act Rule 145(a)(1), 17 C.F.R. § 230.145(a)(2), an exception

neither urged by the parties nor apparently applicable on this record. 

 

15We assume that the parties would have informed the court if the roll-up had never been

effectuated or if there had been a material change from the transaction described in the

Prospectus/Proxy Statement. Our holding is limited to the proposition that unitholders who

turn to the definition of "sale" under the Securities Act, which providesthat "[t]he term"sale' or "sell'

shall include every contract of sale or disposition of a security or interest in a security, for value."

15 U.S.C. § 77b(3). This section is generally interpreted to include exchanges of one security for

another. E.g. United States v. Wernes, 157 F.2d 797, 799 (7th Cir.1946) (holding that offer to

exchange beneficial trust certificates for limited partnership certificates constituted a "sale" for

purposes ofthe Securities Act); see also II LOUISLOSS&JOELSELIGMAN,SECURITIESREGULATION

1085 (1989) ("It is clear on the face of the [definitions contained in the Securities Act] that an

exchange of one security for another is a sale."). In fact, certain exchanges—relating to exchanges

in bankruptcy and exchanges blessed by governmental authorities after hearing, see 15 U.S.C. §

77c(a)(9) & (10)—are specifically exempted from the registration rules, indicating the presumption

that, absent a tailored exemption, the transaction would be considered a "sale" and the Securities Act

provisions would apply.

SEC Rule 145 further demonstratesthat certain exchanges ofsecurities—e.g., in connection

withmergers and consolidations—are covered within the registration provisions ofthe Securities Act

as constituting "sales." See Sec. Act Rule 145, 17 C.F.R. § 230.145(a)(2) & preliminary note (stating

that "[t]he thrust of the rule is that a[ ] ... "sale' occurs when there is submitted to security holders

a plan or agreement pursuant to which such holders are required to elect, on the basis of what is in

substance a new investment decision, whether to accept a new or different security in exchange for

their existing security.").14 Rule 145 permits a "short-form" registration of securities issued as a result

of a consolidation on SEC Forms S-4 or F-4. See id. (preliminary note). The securities exchange at

issue was effected pursuant to both a Form S-4 registration statement and a prospectus, which, as

discussed below, was addressed to PDP unitholders. These factors confirm that the transaction

constituted a "sale" of securities for regulatory purposes of the Securities Act.15 It would be
exchanged PDP limited partnership units for stock in P & P Petroleum are "sellers" for purposes

of the Securities Act. See, e.g., Smallwood v. Pearl Brewing Co., 489 F.2d 579, 591 n. 11 (5th

Cir.1974) ("It is not clear whether Smallwood has exchanged his Pearl certificates for [certificates

of the new company]. In any event, all Pearl shares have in actuality been converted into [shares

in the new company].... Thus the shares of Pearl stock held by Smallwood and other members of

his class have been "exchanged,' regardless of the status of the certificates."), cert. denied, 419

U.S. 873, 95 S.Ct. 134, 42 L.Ed.2d 113 (1974). 

inconsistent to find that the exchange of units of a limited partnership for stock in a newly-formed

corporation is a "sale" for certain purposes of the Securities Act but not a "sale" for purposes of the

private civil remedy to enforce those provisions.

Moreover, we note that the Prospectus/Proxy Statement itself refers to the "sale" of P & P

Petroleum common stock:

This Prospectus/Proxy Statement does not constitute an offer to sell or the solicitation of an

offer to buy any securities other than [P & P Petroleum] Common Stock to which it

relates.... Neit her the delivery of this Prospectus/Proxy Statement nor any sale made

hereunder shall under any circumstances imply that information contained herein is correct

at any time subsequent to its date. (Emphasis added).

The Prospectus/Proxy Statement also specifically recites that "[e]ach holder of PDP Units will

receive 2 shares of [P & P Petroleum] Common Stock for each PDP Unit he owns (emphasis in

original)." This document is obviously designed for two purposes: (i) to solicit proxies from eligible

voters—i.e., limited partners—on the roll-up; and (ii) to serve as a prospectus describing the terms

of the offered securities to all PDP unitholders (and Damson interest-holders). Presumably, this

second purpose explains why the plaintiffsin the instant suit received copies of the Prospectus/Proxy

Statement. Indeed, the document refers specifically both to "holder(s) of PDP Units" and to "limited

partners," depending upon the context of the information given. For example, the discussions of

voting rights and requirements refer only to "limited partners" of PDP, whereas the discussions of

benefits and consequences of the transaction refer to "holders of PDP Units." Consequently, it is

effectively addressed to all PDP unitholders whether entitled to vote on the roll-up or not.

The Prospectus/Proxy Statement defines "holders of PDP Units" as "holders of currently

outstanding units of limited partner interest in PDP." Although we are not provided with "Appendix

A" to the Prospectus/Proxy Statement which defines certain terms used throughout the prospectus,

the partnership agreement issomewhat enlightening asto what "currentlyoutstanding units oflimited
 

16Because we are not provided with the assignment agreements whereby the plaintiffs acquired

their units, we intimate no opinion as to whether the instant plaintiffs come within the terms of the

definition of "assignee." 

partner interest" entails. Under the partnership agreement, a "unit" is defined as "a limited partner

interest in the Partnership equal to a fraction, the numerator of which is one and the denominator of

which isthe totalnumber ofUnits Outstanding...." The term "Partnership Interest" means the interest

"of a Partner or Assignee in the Partnership represented by such Partner's or Assignee's ... Units."

An "Assignee" in turn is

a Person to whom one or more Units have been transferred in a manner permitted under this

Agreement, who has delivered a properly completed and executed Transfer Application and

Eligibility Certification to the Partnership and who thereby has an economic interest in the

Partnership equivalent to that of a Limited Partner but ... otherwise subject to the limitations

set forth in this Agreement on the rights of an Assignee who has not become a Substituted

Limited Partner.

The plaintiffs asserted via affidavit in the court below that they (i) were the beneficial owners of units

oflimited partnership interest in PDP and (ii)received the Prospectus/Proxy Statement describing the

transaction whereby all PDP unitholders would trade in their units for stock in P & P Petroleum.

Although the plaintiffs admit that they did not file applicationsto become substituted limited partners,

they claim that their failure to do so was due to the fact they had already learned of the general

partner's denial of consent to their admission. The plaintiffs additionally point to several instances

in which they were treated as "assignees," including their receipt of the Prospectus/Proxy Statement.

Thus, assuming that they have exchanged their unitsfor stock in P & P Petroleum, the plaintiffs have

created a fact issue as to their standing to contest the registration statement under section 11(a).16

Accordingly, summary judgment on this claim for lack of standing as a "limited partner" was

improper.

The defendants all but concede that the transaction was a "sale" and that the plaintiffs were

"purchasers" for purposes of the Securities Act by their failure to brief this point on appeal; instead,

they argue that the plaintiffs have failed to make a requisite showing of injury or causation. In their

view, the fact that the plaintiffs have act ually profited by substantial increases in their investment

precludestheir standing. We cannot pass upon the merit of this position because it involves evidence
 

17Even if we could reach the issue, we would be hesitant to conclude that there has been no

injury—or merely speculative injury—to the plaintiffs who allege that the defendants improperly

allocated shares of P & P Petroleum rightfully belonging to PDP to P & P Ltd. As the plaintiffs

point out, the increase in the per unit investment would actually represent an increase in their

damages under this theory. 

not introduced to, or evaluated by, the district court. See Conkling v. Turner, 18 F.3d 1285, 1296

n. 9 (5th Cir.1994) (observing that "[t]his court may affirm a grant of summary judgment on any

appropriate ground that was raised to the district court and upon which both parties had the

opportunity to introduce evidence" and collecting cases); cf. Topalian, 954 F.2d at 1131-32 n. 10

(parties may not advance new theories or raise new issues to secure reversal of summary judgment)

(citation omitted).17

2. Section 12(2): the Prospectus/Proxy Statement

Section 12(2) of the Securities Act, 15 U.S.C. § 77l (2), provides generally that any person

who mails a prospectus with untrue materialstatements or material omissions isliable to "the person

purchasing such security fromhim." Again, standing to sue under the private right of action afforded

by this section is based upon the requirement that the plaintiff be a "purchaser" of the security at

issue. The same definition of "sale" discussed above applies to section 12 claims. See 15 U.S.C. §

77b(3); Blue Chip Stamps, 421 U.S. at 735-36, 95 S.Ct. at 1925 (observing that sections 11(a) and

12 of the Securities Act "are by their terms expressly limited to purchasers and sellers ofsecurities").

For the same reasons we found that there was an issue of fact asto standing undersection 11, we find

one with respect to the section 12 allegations.

The defendants' arguments on appeal, however, relate to the plaintiffs' alleged inability to

show knowing participation in, and materiality of, the misstatements and omissions described in the

amended complaint. See, e.g., Schlesinger v. Herzog, 2 F.3d 135, 141 (5th Cir.1993) (stating that

an essential element of a claim under section 12(2) is materiality of the purported misrepresentation

or omission). Those arguments bear upon whether the plaintiffs have made out a prima facie case

of section 12(2) liability—not whether the plaintiffs have standing to assert the claims. As noted

above, the district court held only that the plaintiffs lacked standing to sue under section 12(2)

because they were not limited partners. The argument that the plaintiffs have failed to show
materialityofthe purported misrepresentations and omissionsin the Prospectus/ProxyStatement was

not raised to the district court, and we will not entertain it at this time. E.g., Conkling, 18 F.3d at

1296 n. 9 (implying that summary judgment may not be affirmed on an alternative ground that was

not litigated in the district court).

3. Section 10(b) and Rule 10b-5

 The district court's assumption that the plaintiffs' failure to establish standing as "limited

partners" with the attendant privilege of bringing suit also permeated its disposition oftheir Exchange

Act claims. As noted above, we disagree with the district court that the plaintiffs had to have

standing under Texas law to bring claims under section 10(b) of the Exchange Act, 15 U.S.C. §

78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Standing under these

provisions requires that a plaintiff be an act ual "purchaser" or "seller" of securities who has been

injured by decept ion or fraud "in connection with" the purchase or sale, the so-called "Birnbaum

rule." Birnbaum v. Newport Steel Corp., 193 F.2d 461, 464 (2d Cir.), cert. denied, 343 U.S. 956,

72 S.Ct. 1051, 96 L.Ed. 1356 (1952); accord Blue Chip Stamps, 421 U.S. at 749, 755, 95 S.Ct. at

1931-32, 1934.

The federal co urts have created an exception to this rule when a investor's interest in a

company is fundamentally altered through a merger, acquisition, or liquidation. E.g., Vine v.

Beneficial Finance Co., 374 F.2d 627 (2d Cir.), cert. denied, 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d

460 (1967). This doctrine, known as the "forced seller" doctrine, was spawned originally in a

securities fraud action based upon a short form merger in which the plaintiff was left with no

alternative but to exchange his shares for cash because the corporation in which he had held his

investment had been completely subsumed in the merger:

Due to defendant's act, [the merged-out corporation] has now disappeared and the plaintiff's

stock has, in effect, been involuntarily converted into a claim for cash.... [I]t is precisely

because [the defendant] gives no choice to [the plaintiff] under the [short form merger

statute] and the latter must now exchange his shares for cash that [the plaintiff] can now be

deemed a seller.

Vine, 374 F.2d at 634-35. Accordingly, the Vine court found standing for the shareholder to sue as

a "forced seller" under section 10(b) and Rule 10b-5. Id. at 635.
 

18We note that the majority of cases in this circuit applying the forced seller rule in its most

restrictive sense involve claims of dilution or decrease in the value of a same or similar investment

which the plaintiff continues to hold after the complained of transaction, rather than an actual

exchange of his investment for a different investment in an unrelated company. Compare Jeanes

v. Henderson, 703 F.2d 855, 860 (5th Cir.1983) (termination of option rights alleged to dilute

plaintiff's holdings held not to be a forced sale where plaintiff maintained "an interest in a going

concern"); Alley v. Miramon, 614 F.2d 1372, 1380, 1387 (5th Cir.1980) (observing that a pledge

of securities did not constitute a "sale," whereas a subsequent liquidation converting those shares

into "a claim for cash" would); Broad v. Rockwell, 614 F.2d 418, 438-39 (5th Cir.1980) (finding

that debenture holders whose conversion rights were eliminated in merger were not "sellers"

under section 10(b) and observing that "[a]t all times, the debenture holders possessed a

debenture backed by an ongoing promise to pay principal and interest"), different results reached

on reh'g, 642 F.2d 929 (1981); and Sargent v. Genesco, Inc., 492 F.2d 750 (5th Cir.1974)

(refinancing plan, which included issuance of new shares in exchange for plaintiffs' debentures in

same company and was contended to dilute their holdings, held not to constitute a "sale" of

securities); with Dudley v. Southeastern Factor and Finance Corp., 446 F.2d 303, 307 (5th Cir.)

(Where investor's corporation had been substantially liquidated and ceased to function, the

investment was effectively commuted to a right to payment of money and defrauded investor had

status as a forced seller.), cert. denied, 404 U.S. 858, 92 S.Ct. 109, 30 L.Ed.2d 101 (1971); 

Coffee v. Permian Corp., 434 F.2d 383, 386 (5th Cir.1970) (finding fact issue as to standing as a

forced seller as a result of an allegedly fraudulent liquidation), cert. denied, 412 U.S. 920, 93

S.Ct. 2736, 37 L.Ed.2d 146 (1973). 

The forced seller doctrine was at first quite narrowly interpreted by this court, recognizing

the standing of such an investor only when "the nature of his investment has been fundamentally

changed from an interest in a going enterprise into a right solely to a payment of money for his

shares." Dudley v. Southeastern Factor and Finance Corp., 446 F.2d 303, 307 (5th Cir.), cert.

denied, 404 U.S. 858, 92 S.Ct. 109, 30 L.Ed.2d 101 (1971); Coffee v. Permian Corp., 434 F.2d 383,

386 (5th Cir.1970), cert. denied, 412 U.S. 920, 93 S.Ct. 2736, 37 L.Ed.2d 146 (1973). However,

the concept has evolved—at least in the context of merger and acquisition transactions involving

involuntary exchanges ofsecurities18—in order to keep in step with the realities of the corporate and

securities world, and a subsequent line of cases in this circuit has applied the more flexible

"fundamental change in investment" test to coerced exchangessignificantly altering the nature of the

investment. See Keys v. Wolfe, 709 F.2d 413, 417 (5th Cir.1983) (holding that securities plaintiffs

could state a claim under section 10(b) and Rule 10b-5 upon allegations that there was "such a

significant change in the nature of the investment or in the investment risks as to amount to a new

investment"); Rathborne v. Rathborne, 683 F.2d 914, 921 (5th Cir.1982) ("[W]here a securities

transaction results in a fundamental change in the nature of a shareholder's investment, leaving the
 

19Interestingly, the plaintiff in Smallwood complained of two different transactions—the first

involving the involuntary exchange of his shares in a merger, which the court held to constitute a

sale, and the second "transaction" whereby he maintained his shares in the new company based

upon alleged deception. The court analyzed only the second "maintenance" claim under the

forced seller doctrine and held that it was not sufficient to confer independent standing under the

securities fraud provision of the Exchange Act. Smallwood v. Pearl Brewing Co., 489 F.2d 597,

591, 594-95 (5th Cir.1974). 

 

20In that case, the Supreme Court refused to opine as to whether private plaintiffs could assert

that a merger exchange constituted a "purchase" or "sale" for section 10(b) purposes. SEC v.

National Sec., Inc., 393 U.S. 453, 467 n. 9, 89 S.Ct. 564, 572 n. 9, 21 L.Ed.2d 668 (1969). 

However, the case is instructive in that it holds, albeit in a regulatory context, that "[t]he broad

anti-fraud purposes of the statute and the rule would clearly be furthered by their application to

this type of situation." Id. at 467, 89 S.Ct. at 572. Moreover, this court has recognized that the

Court's distinction between the regulatory context and a private right of action "has not proved

potent." Smallwood, 489 F.2d at 590 & n. 10 (citations omitted). 

plaintiffwith sharesthat represent a participation in a whollynew and different enterprise, the plaintiff

may be considered to be a purchaser or seller."); Smallwood v. Pearl Brewing Co., 489 F.2d 579,

591 (5th Cir.1974) (deciding that investor whose shares in one company were converted into shares

in another under a merger agreement effectively "sold" his shares in the former and "purchased"

sharesin the latter for purposes of Rule 10b-5)19; see also Abrahamson v. Fleschner, 568 F.2d 862,

868 (2d Cir.1977) (applying the rule that, for an exchange of securities to constitute a forced sale,

"there must be such significant change in the nature of the investment or the investment risks as to

amount to a new investment"), cert. denied, 436 U.S. 905, 98 S.Ct. 2236, 56 L.Ed.2d 403, and cert.

denied, 436 U.S. 913, 98 S.Ct. 2253, 56 L.Ed.2d 414 (1978); VIII LOSS&SELIGMAN, SECURITIES

REGULATION at 3710 (observing that the doctrine has been "limited" to situations "where the plaintiff

is forced to surrender a security for cash or for a fundamentally different security " (emphasis

added)); cf. SEC v. National Sec., Inc., 393 U.S. 453, 467, 89 S.Ct. 564, 572, 21 L.Ed.2d 668

(1969) (merger in which shareholders were forced to exchange stock in a new and different

corporation was covered within the parameters ofsection 10(b)).20 Instead of analyzing whether the

transaction left the plaintiff with essentially a mere claim to cash, these casesfocus on the "economic

reality of the transaction" and evaluate the magnitude of the change in the nature of the investment

and accompanying risks. Rathborne, 683 F.2d at 920.

Thus far, Blue Chip Stamps is virtually our only direction from the Supreme Court as to the
 

21This court has acknowledged the continuing vitality of the "forced seller" doctrine after the

Blue Chip Stamps decision. See Alley v. Miramon, 614 F.2d 1372 (5th Cir.1980). 

reach of standing to pursue an implied private right of action under section 10(b). As noted above,

in Blue Chip Stamps, the Court limited standing to sue under section 10(b) to actual purchasers and

sellers. The context of that case is highly relevant to the result. The plaintiffs there were offerees of

a registered stock offering made pursuant to an antitrust consent decree who claimed that they

decided not to purchase the stock due to the "overly pessimistic appraisal" of Blue Chip Stamps'

status and future progress which was contained in the prospectus. 421 U.S. at 726-27, 95 S.Ct. at

1921. The Court observed that on two different occasions Congress had failed to adopt changes to

section 10(b) proposed by the SEC which would have broadened the scope of the statute to cover

offerees and evaluated the benefits of the Birnbaum rule with respect to issues of proof, concluding

that:

[W]hat may be called considerations of policy ... [t]aken t ogether with the precedential

support for the Birnbaum rule over a period of more than 20 years, and the consistency of

that rule with what we can glean from the intent of Congress, they lead us to conclude that

it is a sound rule and should be followed.

Id. at 749, 95 S.Ct. at 1932. The Court did not, however, give any indication as to the continuing

viability or scope of the "forced seller" doctrine.21 Thus, we look to its reasoning for enlightenment.

One of the primary bases for the decision was the fact that other provisions of the securities laws,

including sections 11(a) and 12 ofthe Securities Act, were similarly confined to actualpurchasers and

sellers:

It would indeed be anomalousto impute to Congress an intention to expand the plaintiff class

for a judiciallyimplied cause of action beyond the boundsit delineated for comparable express

causes of action.

421 U.S. at 736, 95 S.Ct. at 1925-26. That danger, as discussed above, is not present in the case

presented because we have held that the plaintiffs have standing to sue under those liability provisions

of the Securities Act. Moreover, the Court in Blue Chip Stamps observed that "[t]hree principal

classes of potential plaintiffs are presently barred bythe Birnbaum rule": (i) potential purchasers, like

the plaintiffs in Blue Chip Stamps, who allege that they decided not to purchase shares in a

corporation "due to an unduly gloomy representation" or omission; (ii) actual shareholders who
decide not to sell; and (iii) "shareholders, creditors, and perhaps others ... who suffer[ ] loss in the

value oftheir investment due to corporate or insider activitiesin connection with the purchase or sale

of securities...." Id. at 737-38, 95 S.Ct. at 1926. Interestingly, the Court did not include those

standing in the shoes of the plaintiffs at bar among its categories of putative plaintiffs who are

frustrated by the Birnbaum rule. Finally, we note that perceived problems of proof involved when

no actualsale takes place—e.g., a lack of documentation asto when and at what price a security was

"purchased" or "sold"—were integral to the Court's analysis. Id. at 734, 742-43, 746, 747, 95 S.Ct.

at 1925, 1928-29, 1930, 1931 ("The virtue of the Birnbaum rule, simply stated, ... isthat it limits the

class of plaintiffs to those who have at least dealt in the security to which the prospectus,

representation, or omission relates."). The evidentiary problems associated with the more speculative

claims described above are simply not present in the case presented where the exchange of the PDP

units for P & P Petroleum stock is well-documented. Cf. Alley v. Miramon, 614 F.2d at 1387

("Proof of a corporate liquidation which may give rise to standing under the forced seller rule is based

on objectively demonstrable facts."). Thus, we do not believe that the teachings of Blue Chip Stamps

would preclude standing assection 10(b) "forced sellers" to investors of merged companies who can

show a substantial change in the nature of their investments. E.g., Rathborne, 683 F.2d at 921;

Abrahamson, 568 F.2d at 868.

The Rathborne rule is consistent with the majority offederal courts and commentators. E.g.,

Securities Investor Protection Corp. v. Vigman, 803 F.2d 1513, 1518 (9th Cir.1986); Swanson v.

American Consumer Indus., Inc., 415 F.2d 1326, 1330-33 (7t h Cir.1969) (recognizing that "the

fraudulent substitution of shareholder status in one company for the same status in another may

constitute a cognizable legal injury in and of itself"); FDIC v. Kerr, 637 F.Supp. 828, 836

(W.D.N.C.1986) (finding standing where the fundamental nature of a plaintiff'sinvestment has been

changed without an actual sale through circumstances beyond his control); see also 3C HAROLD

BLOOMENTHAL, SECURITIES AND FEDERAL CORPORATE LAW § 11.13, 11-53, 11-54 (1994) ("[I]t

appears quit e apparent that in a merger, the shareholders in the corporation being acquired are

purchasers or sellers ... [and that] shareholders in the corporation which does not survive can satisfy
 

22The defendants' grounds for distinguishing Mayer are not compelling. As noted above, we

do not find the plaintiffs' lack of status as limited partners to be applicable to their standing to

assert federal securities claims. Further, as noted below, we find that the amended complaint does

contain specific allegations of fraud and/or deception. Finally, the defendants are mistaken in

claiming that Mayer did not maintain an interest in a going concern. In Mayer, it was the

liquidated partnerships who were left without value; there is no indication that the new

corporation was depleted of assets or that it did not continue to exist. See Mayer v. Oil Field

Sys. Corp., 721 F.2d 59, 65 (2d Cir.1983). 

 

23Although we are mindful of the Supreme Court's caution that "the same words may take on a

different coloration in different sections of the securities laws," SEC v. National Sec., Inc., 393

U.S. 453, 466, 89 S.Ct. 564, 571, 21 L.Ed.2d 668 (1969), we are also persuaded by the fact that

the transaction clearly constituted a "sale" for purposes of the Securities Act, as discussed above

in sections II.B.1 & II.B.2. 

the Birnbaum test...."). Professor Loss notes that, today, standing under the forced seller doctrine

has been expanded to a variety of transactions other than short form mergers where a

defendant's fraud results in a fundamental change in the nature of the plaintiff's investment

without the plaintiff's consent. For example the doctrine has been applied to a limited

partner who had no choice but to accept stock in a corporation in exchange for a

partnership interest in a transaction that was conditioned only on approval by the general

partner.

VIII LOSS&SELIGMAN,SECURITIESREGULATION at 3707 (emphasis added) (citing, inter alia, Mayer

v. Oil Field Sys. Corp., 721 F.2d 59, 65-66 (2d Cir.1983)). In Mayer, an owner of limited

partnership interests in partnerships owning oil and gas properties was forced to exchange her

interests for common stock in a new corporation pursuant to an exchange agreement between the

general partners and the corporation. 721 F.2d at 61. She alleged that the transaction was

implemented by a misleading prospectus and registration statement. Id. at 62. The Second Circuit

found that Mayer had standing to assert section 10(b) and Rule 10b-5 claims because her investment

had fundamentally changed. Id. at 65. The Mayer court carefully distinguished the holdings in

Birnbaum and Blue Chip Stamps on the basisthat the plaintiffsin both of those cases "ended up after

the alleged fraud exactly where they had begun." Id.22 We find these authorities to be well-reasoned

and follow their lead in concluding that a securities exchange, such as in the case at bar, may

constitute a forced sale for purposes ofsection 10(b) and Rule 10b-5 if the plaintiff can demonstrate

"a fundamental change in the nature of the investment."

For the reasons discussed above, we conclude that the "fundamental change in the nature of

the investment" rule should apply to the allegations set forth in the amended complaint.23
 We thus turn to the facts before us. There is no question but that the plaintiffs' allegations

describe a complete alteration of their limited partnership investment. At the beginning of the day,

they owned units in a financially solvent limited partnership, but, after the roll-up transaction was

consummated, they owned stock in a corporation made up of at least six other entities, including

Damson, whose financial predicament was described at some length in the Prospectus/Proxy

Statement. Accordingly, we hold that the plaintiffs have created a fact issue as to their standing to

assert claims under section 10(b) and Rule 10b-5.

As a final attempt to block the plaintiffs'standing, the defendants assert once again that they

have failed to show any injury as a result of the transaction. Once again, we decline to address this

argument, which was not presented in the defendant's papers to the court below.

4. Section 14(a): the Prospectus/Proxy Statement

The plaintiffs' remaining cause o f action is based upon alleged misleading statements and

misrepresentations in the Prospectus/Proxy Statement used to solicit approval for the roll-up

transaction. Section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), prohibits the solicitation of

proxies by virtue of misleading proxy statements. We view section 14(a) as protecting only

interest-holders with voting rights. See, e.g., Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083,

1106-08, 111 S.Ct. 2749, 2765-67, 115 L.Ed.2d 929 (1991) (holding that shareholders whose votes

are not required by law or corporate by-law to authorize a corporate action for which proxies are

solicited are not entitled to bring an action under 14(a) where they cannot show a causal nexus

between the proxy statement and injuries); United PaperworkersInt'l Union v. International Paper

Co., 985 F.2d 1190, 1198 (2d Cir.1993) (noting that the SEC promulgated Rule 14a-9 "with the goal

of preserving for allshareholders who are entitled to vote, not just for those who sponsor proposals,

the right to make decisions based on information that is not false or misleading" (emphasis added)).

Indeed in J.I. Case Co. v. Borak, the Supreme Court observed that the stated congressional purpose

of section 14(a) was to " "control the conditions under which proxies may be solicited with a view

to preventing the recurrence of abuses which ... [had] frustrated the free exercise of the voting rights

of stockholders.' " 377 U.S. 426, 431, 84 S.Ct. 1555, 1559, 12 L.Ed.2d 423 (1964) (quoting
 

24See also S.Rep. No. 792, 73d Cong., 2d Sess., 12 (1934) ("Too often proxies are solicited

without explanation to the stockholder of the real nature of the questions for which authority to

cast his vote is sought (emphasis added)."). 

H.R.Rep. No. 1383, 73d Cong., 2d Sess., 14 (1934)).24 Although section 14(a) does not necessarily

require that the plaintiff have actually voted in reliance upon the challenged Prospectus/Proxy

Statement—e.g., Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384-85, 90 S.Ct. 616, 621-22, 24

L.Ed.2d 593 (1970); Keyser v. Commonwealth Nat'l Fin. Corp., 121 F.R.D. 642, 648 n. 15

(M.D.Pa.1988); Hershfang v. Knotter, 562 F.Supp. 393, 397-98 (E.D.Va.1983), aff'd, 725 F.2d 675

(4th Cir.1984)—we believe that it goes too far to allow persons not even entitled to vote to assert

a claim under that provision. As noted in one of the cases cited by the plaintiffs, the rationale for

permitting a stockholder to assert a cause of action under section 14(a) regardless of whether he

actually relied upon the misleading statement is to protect the voting process as a whole from

misinformation; it is simply a recognition that the stockholder is bound by the collective action of his

other stockholders who may have been misled by the statement. Dowling v. Narragansett Capital

Corp., 735 F.Supp. 1105, 1120 (D.R.I.1990); see also Dann v. Studebaker-PackardCorp., 288 F.2d

201, 209 (6th Cir.1961) (observing that "the right sought to be protected by federal law is the right

to full and fair disclosure incorporate elections" and holding that the non-voting plaintiffstockholders

had standing under section 14(a) because "they could suffer equally damaging injury to their

corporate interests merely because other [voting] shareholders were deceived ...").

None of the cases cited by the plaintiffssupports a holding that a person not even eligible to

vote hasstanding to maintain an action undersection 14(a). Indeed, the plaintiffs in those cases were

universally shareholders with voting rights. The authority that comes closest to sustaining their

position is Palumbo v. Deposit Bank, 758 F.2d 113 (3d Cir.1985); however, that case is

distinguishable. In Palumbo a disgruntled director, who was also the largest shareholder of the

banking corporation, was ousted from his position as director via an allegedly misleading proxy

statement. Id. at 114. Although the decision includes language to the effect that "[s]tanding depends

upon injury," and discusses Palumbo's injury in terms of his capacity as a director, see id. at 116,

Palumbo's status as a shareholder with voting privileges cannot be overlooked. We cannot believe
 

25The December 18, 1990, letter from Lon Kile, a PDP vice-president, to various entities

involved in the proxy solicitation set December 26, 1990, as the "record date" for determining

which unitholders were entitled to vote. Contrary to the plaintiffs' argument, the letter's reference

to "unitholders" is entirely consistent with the above-quoted provision of the partnership

agreement permitting only those "unitholders" who are limited partners of record to vote. 

 

26The plaintiffs also claim that the "defendants' counsel admitted that proxy vote authorizations

received from all PDP Unitholders were to be voted at the special meeting to be held on February

19, 1991." However, the citation to the record is to an affidavit of the plaintiffs' counsel as to his

understanding of the arrangement. What the plaintiffs' counsel may have been told is inadmissible

hearsay and, in any event, does not evidence an "admission" that the votes of non-"limited

partner" unitholders were tabulated in the meeting. 

that the Supreme Court, in finding a private right of action under section 14(a), see Borak, 377 U.S.

at 431, 84 S.Ct. at 1559, intended to open Pandora's box by extending that right to any person

potentially injured by a proxy statement; otherwise, standing could be justified for disappointed

potential merger partners, disgruntled employees, etc. Accordingly, we are unwilling to expand

standing under section 14(a) of the Exchange Act to interest-holders who are not qualified to vote.

Finding that voting rights are critical to standing under section 14(a), we look to the relevant

documents to determine whether the plaintiffs had such rights and conclude that it is clear that they

were not entitled to vote on the proposal embodied in the Prospectus/Proxy Statement. The

document itself specifically recites that "[o]nly limited partners of PDP at the close of business on

December 26, 1990, as shown on PDP'srecords, will be entitled to vote, or to grant proxies to vote,

at the meeting of the limited partners of PDP." The references throughout reflect that the voting

provisions of the Prospectus/Proxy Statement were addressed exclusively to PDP'slimited partners.

The partnership agreement confirms that:

Only those Record Holders of Units who are Limited Partners on the Record Date set

pursuant to Section 15.725 shall be entitled to notice of and to vote at a meeting of Limited

Partners.... With respect to Units that are held by persons who have not been admitted as

Limited Partners, the General Partner will be deemed to be the Limited Partner with

respect to such Units and will vote such Units in the same percentages as the other Units

have been voted with respect to a particular matter (emphasis added).

The fact that the plaintiffs may have received proxy materials does not override the unequivocal

provisions of the partnership agreement and Prospectus/Proxy Statement.26

5. Substantive claims under the Federal securities laws

Having found that the plaintiffs have the requisite standing to assert claims under sections
11(a) and 12(2) of the Securities Act, section 10(b) of the Exchange Act, and Rule 10b-5, we turn

to the defendants' general assertion that the plaintiffs have failed to plead cognizable federalsecurities

claims. According to the defendants, the plaintiffs allege at most mismanagement, including waste,

breach of fiduciary duty, and conversion—none of which is sufficient to invoke the federalsecurities

laws. E.g., Rodman v. Grant Found., 608 F.2d 64, 72-73 (2d Cir.1979). While we agree with the

defendants that a federal securities action should not lie for state law causes of action, we disagree

with their premise that the plaintiffs' allegations are limited to mismanagement. Rather, as discussed

above in section I-C, the plaintiffs make several precise attacks upon misstatements and omissions

contained in the Prospectus/Proxy Statement which was also filed with the SEC as part of P & P

Petroleum's stock registration. This case therefore falls within the bounds of the Supreme Court's

decision in Santa Fe Indus., Inc. v. Green, holding that, although mismanagement or breach of

fiduciary duty generally would not violate the federal securities laws, an action for securities fraud

was appropriate for those cases "in which the breaches of fiduciary duty held violative of Rule 10b-5

included some element of deception." 430 U.S. 462, 474-76 & n. 15, 97 S.Ct. 1292, 1301-02, n. 15,

51 L.Ed.2d 480 (1977). After viewing the amended complaint with an eye favorable to the plaintiffs,

as we must , we cannot conclude that the plaintiffs will be unable to prove any set of facts which

would entitle themto relief. E.g., Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d

80 (1957); Keys v. Wolfe, 709 F.2d at 417. Nor have the defendants directed us to summary

judgment evidence which would show an absence of anyfactualissue on this point; rather, on appeal,

the defendants argue only that the plaintiffs have "failed to plead their claimssufficiently to cause this

Court to probe the substantive federal securities laws" (emphasis added). Accordingly, this

contention is not groundsfor alternatively affirming summary judgment on those claimsfor which we

have found standing.

III. Conclusion

For the foregoing reasons, we REVERSE the district court's summary adjudication of the

plaintiffs' causes of action under (i) sections 11 and 12 of the Securities Act and (ii) section 10(b) of

the Exchange Act and SEC Rule 10b-5 promulgated thereunder, and REMAND for further
consideration of those claims in accordance with this opinion. We AFFIRM the remainder of the

district court's judgment. Costs are to be borne by the defendants-appellees.