Appeal by plaintiff from an order of the District Court for the Southern District of New York, Robert W. Sweet, Judge, dismissing for failure to state a federal claim on which relief can be granted, the amended complaint of a limited partner in two oil and gas limited partnerships, which alleged various violations of the federal securities laws and asserted a pendent state claim for violation of fiduciary duties. Reversed and remanded.
Friendly, Kearse and Cardamone, Circuit Judges.
Plaintiff Elfriede Mayer (Mayer) appeals from a judgment of the District Court for the Southern District of New York, Robert W. Sweet, Judge. The order dismissed an amended complaint which alleged violations of §§ 11 and 12(2) of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 of the Securities and Exchange Commission, and common law fiduciary duties, because of failure to state claims under the federal securities laws on which relief can be granted. Mayer filed the suit as a class action on behalf of all persons who held interests in certain limited partnerships in which defendant Oil Field Systems Corp. (OFS) was a general partner, which had been exchanged for shares of defendant Integrated Energy, Inc. (Integrated) pursuant to an exchange agreement between OFS, the controlling general partner of such partnerships, and Integrated. For simplicity we shall generally treat the case as if plaintiff was suing simply on behalf only of herself and the limited partners of two partnerships in which she was a limited partner. Named as defendants, in addition to OFS and Integrated, were Burton Joel Ahrens, the president of OFS, and "John Doe" defendants who were characterized as the general partners of other limited partnerships who joined in the scheme to defraud limited partners which plaintiff claimed OFS and Integrated had perpetrated against her.
The allegations of Count 1 of the amended complaint*fn1 are as follows: Mayer had purchased for an unstated sum limited partnership interests in the Mark Energy 1979 Indiana County Drilling Program and the Mark Energy-OFS 1980 Year-End Indiana County Area Drilling Program, two of several limited partnerships (the Mark Energy Partnerships) in which OFS was the general partner. The limited partnership agreements provided that the limited partnership interests would be repaid in full before the general partners would receive "a profit or other consideration or emolument from the liquidation or other disposition of limited partners' Interests." Only after the "pay-back" to the limited partners were the general partners "to receive any additional consideration and/or profit from the limited partnerships or from the liquidation or other disposition of limited partners' Interests." Defendants planned and schemed to circumvent these provisions by fixing a value of $10 per share for the Integrated shares to be received by the limited partnerships, "a value that Integrated shares did not have as defendants well knew", in order to generate a "pay-back" whereby the general partners in the exchange would receive shares to which they were not entitled. Integrated participated in this scheme since it received "a schedule of shares to be distributed from the general partners" and knew from this and other data "that the limited partners had received only a small return on their investments." "On the basis of the material, dramatic and artificially inflated value of Integrated shares to $10 per share, defendants wrongfully created the illusion of a pay-back of the investments of the plaintiffs and others similarly situated and the defendant general partners did thus wrongfully share in the exchange of limited partnerships for Integrated shares by an accelerated payout to the general partner defendants", all of which the defendants omitted to disclose in the Prospectus and Prospectus Supplement and the Registration Statement filed with the SEC by Integrated, which the defendants disseminated to the plaintiff and other limited partners. To the contrary, defendants caused to be distributed to the limited partners correspondence containing false and misleading statements or material omissions. The only correspondence cited was a letter from defendant Ahrens which made the statement quoted in the margin.*fn2 This was alleged to be false and misleading in that Bache was not an underwriter but simply the manager of Integrated's offering. Also the statement and inference that the Integrated shares would "zestily rebound" was erroneous and misleading in that defendants knew that the value of the shares did not approach $10. By reason of the foregoing the shares of Integrated were falsely registered and the exchanges were wrongfully made in violation of §§ 11 and 12(2) of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. Plaintiffs offered to return their Integrated securities pursuant to § 12(2) of the 1933 Act, and demanded recission and/or damages for themselves and for the class they sought to represent. A second count alleged that the recited acts constituted violations of defendants' common-law fiduciary duties.
Integrated then filed a "reply memorandum" supporting its previous motion to dismiss the original complaint and an affidavit of counsel, see supra note 1. The affidavit stated that while Integrated's motion was based "entirely on legal grounds", it was "necessary to examine the documents pursuant to which the securities were issued in order to understand plaintiff's pleadings which refer to those documents but do not attach them." These documents were Integrated's Prospectus dated March 24, 1981, its Prospectus Supplement dated September 11, 1981, and the final form of the Registration Statement, filed with the SEC on September 11, 1981. Defendants OFS and Ahrens also filed a "Reply Memorandum in Support of Motion to Dismiss Complaint" accompanied by a "reply affidavit" of Ahrens, attaching excerpts from the Mark Energy Partnership Agreements and also making a number of factual statements.
The district court dismissed the amended complaint pursuant to Fed. R. Civ. P. 12(b)(6) on the ground that Mayer lacked standing to sue under the federal securities laws. Evidently the court did not rely on factual claims made in Ahrens' reply affidavit as indeed it could not without running afoul of the applicable Federal Rules of Civil Procedure. Rule 12(b)(6) provides that if "matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material pertinent to such a motion by Rule 56." Fed. R. Civ. P. 12(b)(6). Rule 56, in turn, requires the court to give parties at least ten days notice of conversion of a Rule 12(b)(6) motion in order that they may present relevant materials. Fed. R. Civ. P. 56(c). See, e.g., Beacon Industries v. Menzies, 715 F.2d 757 (2 Cir. 1983). Although approximately ten weeks elapsed between the filing of the reply affidavits and the district court's dismissal of the amended complaint, thus affording Mayer ample opportunity to challenge the statements contained therein, Mayer had no occasion to respond to the affidavits in view of the lack of notice of "conversion" of the motion from one addressed to the complaint into one for summary judgment, and in the district court's view of the case it had no need to resort to the affidavits. In this court the appellees, while defending the district court's action on the ground on which it was placed, assert other grounds as well. In order to understand these we will recount material in the affidavits to illuminate the areas of debate, although for the reason indicated we cannot properly rely on them when they run counter to the amended complaint unless, as in the case of documents such as the partnership agreements and the Prospectus, they are incontrovertible.
The story, as constructed on this basis, is as follows: OFS served as the general partner for numerous limited partnerships engaged in the business of exploring for, developing, and exploiting oil and gas properties. The Mark Energy Partnerships, which were formed under Pennsylvania law, were two of the OFS limited partnerships.
The partnership agreements provide that the general partner is exclusively to manage and control the business of the partnership and make all decisions affecting their affairs. Article X, containing the "Rights and Obligations of Limited Partners", provides that no limited partner shall take part in the management of the partnership's affairs or transact any business for the partnership. Sometime during 1981 representatives of Integrated approached OFS, as they did many other similar limited partnerships, regarding the possible exchange of oil and gas properties owned or leased by the limited partnerships in return for shares of Integrated. It was explained that Integrated was a newly formed company which planned to acquire extensive oil and gas properties from companies already in operation which Integrated would then operate. Values were set for the properties to be acquired; the Prospectus states that generally these were to be the discounted present value of the estimated future net revenues from each partnership's proved oil and gas reserves less a discount of 5%, plus the value of other assets. The exchange was thought to produce "tax benefits from, among other things, capital gains treatment available for appreciation in the equity securities represented by the Integrated stock, and enhanced liquidity by reason of replacing a highly illiquid investment of speculative value with stock traded on the American Stock Exchange." OFS accepted Integrated's offer and transferred its oil and gas properties in return for Integrated stock and Integrated's assumption of $620,302 of debt.
The Prospectus Supplement, which was filed with the Registration Statement as a post-effective amendment, stated that the number of Integrated shares for which interests would be exchanged "has been determined by dividing the Exchange Values of such Interests by $10.00, an arbitrary figure." It went on to explain:
There can be no assurance that Holders who receive Common Stock in exchange for their Interests will thereafter be able to sell such Common Stock for prices equal to $10 per share, in which event Holders who sell such Common Stock may realize less than the Exchange Values assigned to these Interests. Future prices of the Common Stock issued pursuant to the Exchange Offer may be significantly lower than $10 per share and will depend upon many factors, including future operations and earnings of the Company, future legislation and other developments affecting the oil and gas industry in general, and business and economic conditions.*fn3
It also detailed how the Exchange Values had been computed. The Prospectus Supplement went on to list hundreds of properties to be acquired from scores of owners, their exchange values and the aggregate shares offered for tendered interests. These included ten properties being acquired from "Oil Field Systems Interests." Among these were the Mark Energy 1979 and the Mark Energy 1980 Year-End properties. These were stated to have exchange values of $4,073,050 and $2,132,800, and to be offered 407,305 and 213,280 shares, respectively. A footnote explained that the exchange values for the OFS interests had been reduced by an aggregate of $1,825,000 of indebtedness, and that additional shares, including 118,197 and 71,648, for the partnerships in which plaintiff was a limited partner, had been placed in escrow pending redetermination of the reserves as of later dates.
Ahrens' affidavit continues that:
In the exercise of its exclusive authority over the business and affairs of the Mark Energy Partnerships, OFS decided to distribute to the limited partners of the Mark Energy Partnerships the Integrated stock transferred pursuant to the Exchange, as there was no reason for the Mark Energy Partnerships themselves to hold the stock. To implement this decision, OFS decided, as a matter of expedience, to have Integrated issue the ...