Court Opinion

ID: 9708997
Source: CourtListenerOpinion
Date Created: 2023-08-26 03:37:31.120538+00
Date Added: 2024-06-11T18:22:45.262611
License: Public Domain

Mr. Justice Davis, dissenting: I can neither concur with the reasoning of the majority which places the transactions before us beyond the scope of section 2 of the Illinois Securities Act, nor understand their failure to consider the charge of violation of the Federal Securities Act, as alleged in count II of the complaint and assigned as error and so argued by plaintiffs. These transactions cannot be placed outside the purview of the State or Federal Securities Acts without ignoring the plain language of the statutes and the clear economic import of the transactions. The statutes are drawn in the broadest terms: “The word ‘securities’ shall mean and include * * * investment contracts, * * * participation certificates, * * * certificates evidencing shares or interest ffi * * * associations, * * * or any contract * * * representing * * * evidence of * * * title to or interest in * * * property * * * of the Issuer thereof, and any oil, gas or mining lease, royalty, or deed, and interest, units or shares in any such lease, royalty, or deed * * * and any other instrument commonly known as a security * * *. The term ‘sale’ means and includes contracts and agreements whereby securities are sold, traded or exchanged for money, property or thing of value, or any transfer or agreement to transfer, in trust or otherwise.” Ill. Rev. Stat. 1953, chap. 121%, par. 97. “(1) The term ‘security’ means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, 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 ‘security,’ or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.” U. S. Code, Title 15, chap. 2A, subchap. 1, par. 77b (1). By the breadth of the language used, our congress and legislature, as well as the legislatures of other States, sought to bring the widest variety of economic speculation within the purview of regulation, and tO' avoid devious and ingenious schemes to circumvent the act. See Bloomenthal, SEC Aspects of Oil and Gas Financing, 7 Wyo. L. J. 49? 55 (i953) i 46 Col. L. Rev. 885. The history of the exploitation of oil and gas rights is one of great commercial and economic development with concurring wildcat speculation and fraudulent and deceitful promotions. “(It) has been accompanied by the creation of legal interests which are, in many respects, sui generis. The law relating to these interests combines familiar principles of the law of property, contracts, landlord-tenant, and tenancy-m-common; however, in no other field are they combined in the particular pattern and with the particular overtones that they are found in oil and gas law.” Bloomenthal, SEC Aspects of Oil and Gas Financing, 7 Wyo. L. J. 49. It was therefore reasonable and necessary that securities be defined so as to embrace every clear attempt to provide a type of “security” investment regardless of the peculiar legal form of the transaction. In a situation similar to the one before us, the Supreme Court of the United States laid down a succinct but useful test, applicable here. “The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” (Securities & Exchange Com. v. Howey Co. 328 U.S. 293, 301.) In view of the salutary purposes of regulatory securities legislation, the term “securities” has been given a broad and liberal construction. (Securities & Exchange Com. v. C. M. Joiner Leasing Corp. 320 U.S. 344; Anno. 163 A.L.R. 1030 et seq.) “The statutory policy of affording broad protection to investors is not to be thwarted by unrealistic and irrelevant formulae.” (Securities & Exchange Com. v. Howey Co. 328 U.S. 293.) In determining whether a particular instrument is a security within the meaning of the statute, the substance of the transaction and the relationship between the parties will control as against the form of the alleged security. Securities & Exchange Com. v. Universal Serv. Assn. (C.C.A. 7th) 106 F.2d 232; certiorari denied 308 U.S. 622. I do not understand that my colleagues of the majority disagree with these principles, and indeed they admit that the instruments “on their face” are “securities” within the purview of the Illinois statute, and that the resulting transactions might lead one to believe that the money was paid for a working interest in the leases. However, I believe that these conclusions determine the question before this court. I find no' “conflict between the import of the instrument and the parties’ own understanding of its terms.” The letter agreement prepared by defendant, provided: “It is also agreed that you are purchasing this interest for investment purposes only without any present intention of reselling this interest.” This provision illustrates that defendants, sellers of the interests and drillers of the wells in question, recognized the transaction as a sale of a working interest, or lease, for it is certain that no one would purchase a share of the drilling cost of an oil well as an investment. The letter agreement was artfully drafted by the defendants. It commences: “We will assign to- you an undivided * * * working interest, under oil and gas leases * * * for the sum of-.” The letter continues with a usual and customary covenant as follows: “We agree to commence * * * the drilling of a well for oil and/or gas, to diligently prosecute the drilling of same and to test all possible oil formations * * * for the sum of-which is your share of the drilling cost of this well.” It is definite that the assignment is to be made for a certain sum, which is to be considered a share of the drilling cost. In clarification of the agreement, the letter further states that: “In the event of a producing well, it is understood and agreed that, in addition to the amount as set up above, you will pay your proportionate part of the casing, drilling in expense (etc.).” The majority concludes that it was the agreement of the parties that only one sum was to1 be paid. I do not consider that this gives rise to an ambiguity, but rather believe that it expresses a reasonable understanding of the terms of the contract. The plaintiffs, who had no knowledge or experience in the oil business, clearly desired to provide venture capital which would be used for the drilling of an oil well in the anticipation that they would receive a royalty or leasehold interest in the oil produced. The defendants-promoters, on the other hand, obtained money to finance their drilling operation in exchange for the promise of a portion of the anticipated oil profits. Clearly, this was a case of investment of money in a common enterprise by the plaintiffs with the anticipated profits to come solely from the efforts of defendants. (Securities Exchange Com. v. Howey Co. 328 U.S. 293.) The instrument was a security under the definitions of the Illinois and Federal Securities Acts. Ill. Rev. Stat. 1953, chap. 121½ pars. 96-37.18, incl.; U.S.C. Title 15, chap. 2A, subchap. I, par. 77b(i). The form of the instrument does not in any way change the obvious practical and economic relationship of the parties. As was said by the Supreme Court of the United States in Securities & Exchange Com. v. C. M. Joiner Leasing Corp. 320 U.S. 344: “It is clear that an economic interest in this well drilling undertaking was what brought into being the instruments that defendants were selling and gave to the instruments most of their value and all of their lure. The trading in these documents had all the evils inherent in the securities transaction which it was the aim of the Securities Act to end.” It seems to me that the majority has left the world of realism when they state that “the development contract aspects of the instrument were uppermost in the minds of the parties. The only sums advanced by plaintiffs were for drilling costs — not in payment of shares in working interests.” The plaintiffs invested money, with the understanding that it would be used for drilling a well; but the drilling of the well, in itself, would benefit them not an iota unless they received, for that investment, a right to share in the oil benefits reaped by the drilling efforts of the defendants. There was no provision for further payment for the acquisition of a “working share” but merely an agreement to pay certain set expenses upon production of oil. However, even if we assume, as the majority hold that, “at best, the transfer of a working interest was incidental to the development contract,” the majority conclusion is contrary to the provisions of the Illinois Securities Law which reads: "Any security given or delivered with, or as a bonus on account of, any purchase of securities or other thing of value shall be conclusively presumed to constitute a part of the subject of such purchase and to have been sold for value.” (Ill. Rev. Stat. 1953, chap. 121½, par. 97(4).) Thus any working interest given or delivered with, or as a bonus on account of payments made for drilling costs, under the act is conclusively presumed to constitute a part of the subject of such purchase and to have been sold for value and constitutes a sale within the purview of the act. Whittaker v. Hall, 226 Fed.2d 868. There is nothing in the activities of these parties to detract from the clear language of their written agreement. The practical relationship between the parties is inescapable. The defendants had a lease and financed the exploitation of that leasehold interest by obtaining their drilling expenses in exchange for a conveyance of a working interest. Their gain was to be obtained without financial risk, by the retention of a substantial overriding interest. This was not a joint venture. There was neither provision for any control of the operation by the plaintiffs, nor for them to share in any losses of the venture beyond their initial investment. I believe that the hyper-technical and basically impractical analysis of the majority has given rise to a simple method to circumvent the Securities Act and create a potentially powerful instrument for fraudulent promotions to bilk the public, and that the decision serves to judicially abrogate the clear language and intention of the legislature. In my opinion, the fact that both parties sought to take advantage of the special provisions of the Internal Revenue Code does not militate against this view. The purposes and policies behind the deductions and exemptions allowed by our Federal tax laws are far different from those which form the basis of our State and Federal “Blue Sky” laws. Even though the Congress of the United States sees fit to permit the deduction of these expenses, this circumstance neither lessens the imminent danger of fraud which our Securities Acts were designed to prevent, nor aids in their construction. The tax treatment of these expenditures by the parties should not serve to abrogate a regulatory statute of this state or nation. Schaefer and KlingbiEL, JJ., concur in the foregoing dissenting opinion.