Opinion ID: 537185
Heading Depth: 2
Heading Rank: 2

Heading: issues raised by associate defendants

Text: 129
130 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. Sec. 77b(1)), Section 3(a)(10) of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78c(a)(10)), and Section 25019 of the California Corporations Code. 22 We agree. 131 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, 105 S.Ct. 2297, 85 L.Ed.2d 692 (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, 105 S.Ct. at 2304. 23 132 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 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). 24 133 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. 25 134
135 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. 136 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. 137
138 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 made no express findings concerning the adverse tax consequences allegedly suffered by the Associate Defendants. 26 139 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. 140 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 tax benefits), cert. denied, 455 U.S. 938, 102 S.Ct. 1427, 71 L.Ed.2d 648 (1982), overruled on other grounds, In re Data Access Systems Securities Litigation, 843 F.2d 1537, 1550 (3d Cir.) (en banc) (implicitly overruling Sharp on statute-of-limitations issue), cert. denied, --- U.S. ----, 109 S.Ct. 131, 102 L.Ed.2d 103 (1988); but cf. Randall v. Loftsgaarden, 478 U.S. 647, 666-67, 106 S.Ct. 3143, 3154-55, 92 L.Ed.2d 525 (1986). 141