Court Opinion

ID: 9628038
Source: CourtListenerOpinion
Date Created: 2023-08-22 09:05:28.487538+00
Date Added: 2024-06-11T09:06:36.828248
License: Public Domain

Rees, J.:
Concurring.
The twenty-one convictions before us are for the sale of an unregistered security (K.S.A. 17-1255), failing to register as a broker-dealer or agent (K.S.A. 1980 Supp. 17-1254[a]), and an unlawful act in connection with the sale of a security (K.S.A. 1980 Supp. 17-1253[a]), arising out of each of seven sales. The K.S.A. 1980 Supp. 17-1253(a) convictions, the “fraud” convictions, are the real subject of this appeal.
When the sales were made, Puckett was obligated to effect an assignment of a carried interest of 25% of the “working interest” and an identical interest was to be reserved to Puckett. In the sales negotiations, the purchasers were informed of the location of the acreage, flooding operations taking place on or planned for adjacent and nearby acreage, and the price asked of the purchaser. There is no substantial evidence of other statements made to the purchasers. The purchasers were not told of the carried interests. Each sale was made on a turnkey basis. Payment of the agreed *706purchase price constituted the purchaser’s contribution toward the drilling, completion and equipping costs. The purchaser would owe nothing to and was entitled to no repayment from the operator no matter what the total amount of those costs might be. Upon production, the purchaser was liable for payment of his proportionate share of the operating costs.
At the heart of the “fraud” convictions is the question whether the existence of the carried interests was a material fact. The prosecution’s position throughout has been that by failing to inform the purchasers of the existence of those interests, Puckett did not “state a material fact necessary in order to make the statements made, in the light of the circumstances under which they [were] made, not misleading.” K.S.A. 1980 Supp. 17-1253(a)(2). Puckett’s position is that the existence of the carried interests was not a material fact because the purchasers “bought in” on a turnkey basis—each purchaser got just what he bargained for, a specific fractional interest in the production, if any.
To avoid misunderstanding by some readers, it may be of worth to briefly comment on the term “carried interest.” It is a technical term used in the oil industry. It appears it does not define any specific form of an agreement but rather serves merely as a guide in preparing and interpreting agreements. Apparently industry practice ordinarily calls for reimbursement to the carrying party first from future production, that is, the carried party does not share in the production until the carrying party has recouped his advances, although the terms of a carried interest are to be fixed by agreement. Ashland Oil & Refining Company v. Beal, 224 F.2d 731, 735 (5th Cir. 1955); Byrd v. Smyth, 590 S.W.2d 772, 775 (Tex. Civ. App. 1979); 38 Am. Jur. 2d, Gas and Oil § 179, p. 660; Williams & Meyers, Oil and Gas Law, Manual of Terms (1980 Supp.) p. 66; 2 Williams & Meyers, Oil and Gas Law § 424, pp. 437-439, § 424.1, p. 443 (1981). Under the evidence in this case, a purchaser was to recoup his investment only from the distributions to him for his share of production less operating costs.
The merit of the prosecution’s case had at its foundation the circumstances of the sales. These necessarily and unquestionably included the fact the sales were turnkey, the linchpin of the defense. The materiality of the existence of the carried interests, an ultimate fact, and the jury decision of guilt or innocence hinged upon the interplay of carried interests and turnkey purchases.
*707To prove its case on the materiality question, the prosecution presented the expert testimony of two witnesses. Each testified the existence of a carried interest is a material fact for consideration in the purchase of the cost-burdened working interest under an oil and gas lease. Neither turnkey purchase of the totality of the cost-burdened working interest under a lease nor turnkey purchase of a fractional cost-burdened working interest under a lease was shown as having been considered in arriving at their opinion.
Defense counsel was denied cross-examination inquiry on the subject of turnkey purchase. The defense was not allowed to test the witnesses’ opinions in the light of a fact pivotal to resolution of both ultimate fact and issue. In my view, this was an abuse of discretion by the trial judge that amounts to reversible error. Were it not for the expert testimony, defendant stands convicted on the testimony of disappointed investors who after the fact and as the product of inquiry by state officials reason their unsuccessful investment decisions were founded on nondisclosure in a subject matter area concerning which few, if any, of them had or even now have any knowledge. Even though Ziegler v. Crofoot, 213 Kan. 480, 486-488, 516 P.2d 954 (1973), approved admission of expert opinion testimony embracing an ultimate fact, I fail to see it or the circumstances of this case make it proper to insulate the experts’ opinions from testing through cross-examination. Compare Lollis v. Superior Sales Co., 224 Kan. 251, 260-63, 580 P.2d 423 (1978). Reversible error has been found on the ground cross-examination was unduly restricted. Bourgeois v. State Highway Commission, 179 Kan. 30, 34, 292 P.2d 683 (1956).
I would affirm the fourteen non-“fraud” convictions. I would reverse the seven “fraud” convictions because of undue restriction on the cross-examination of the prosecution’s experts, and grant defendant a new trial on those charges.
While there is merit to the majority’s criticism of the fraud instructions, I am not prepared to say it is our calling to reverse a trial court judgment, even in a criminal case, where we find a “clear error” that has not been raised by the appellant either at the trial level or on appeal. Except for that, I express no views with regard to the majority’s treatment of other issues; nothing need be said or decided with respect to the other issues raised in challenge of the “fraud” convictions.
*708If defendant is tried again on the “fraud” charges, consideration should be given to revision of the instructions on the elements of the offense.