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SPITZER v. SHANLEY CORP.

December 15, 1994

M. JAMES SPITZER and LEONARD LICHTER, as Trustees Under Agreement dated May 10, 1987, Plaintiffs,
v.
SHANLEY CORPORATION, SHANLEY PRODUCTION COMPANY, SHANLEY OIL COMPANY, SHANLEY ENERGY COMPANY, JOHN SHANLEY, and NEAL McCABE, Defendants.


Morris E. Lasker, U.S.D.J.


The opinion of the court was delivered by: MORRIS E. LASKER

LASKER, D.J.

 Norstate Limited Partnership was created in Oklahoma for the purpose of investing in oil and gas wells in Oklahoma and Texas. Norstate's general partner, Shanley Production Company, is a wholly-owned subsidiary of Shanley Corporation, a Delaware corporation whose former CEO, Neal McCabe, is the sole defendant to have gone to trial in this action brought by Norstate's limited partners. The limited partners allege, among other things, that as a former director of both Shanley production and its parent company, McCabe is subject to liability for conversion and for breach of a fiduciary duty owed the limited partners. The case against McCabe has been tried to the bench. I find the following facts and reach the following conclusions of law. *fn1"

 FACTS

 Leonard Lichter and M. James Spitzer, partners in the law firm Spitzer & Feldman, are trustees of a trust created for the benefit of the Norstate limited partners.

 Neal McCabe was chairman of the board of Shanley Corp. from March, 1981 until 1988. Before 1986, he was named Shanley Corp.'s CEO. McCabe was also chairman of the board of Shanley production from the time of its acquisition in 1983 until 1988.

 During the relevant period, the Norstate Limited Partnership owned property that included producing oil and gas wells, whose operating profits were paid to the general partner, Shanley Production. Shanley, in turn, was to distribute a percentage of these proceeds to the limited partners.

 McCabe, chairman of the board and CEO of Shanley Corp., and chairman of Shanley Production, was in charge of acquisitions for Shanley Corp. A licensed securities broker with prior experience at Salomon Brothers, his duties at Shanley included the identification of companies to be acquired by the parent corporation and the negotiation of such acquisitions. In fact, Nord petroleum, the company which later became Shanley Production, was identified for acquisition by McCabe, who was the main Shanley representative in negotiations with Nord (Lichter testified that, during these negotiations, McCabe asked him about the Norstate Limited Partnership and the willingness of the limited partners to make contributions to it). Where necessary, McCabe also structured the financing of acquisitions by Shanley Corp.

 John Shanley, president of Shanley Corp. and CEO of Shanley Production, founded Shanley Corp. Shanley was formerly a vice-president of corporate finance at Salomon Brothers, where he met McCabe. As the founder and top officer of Shanley Corp., John Shanley did not have a single, well-defined area of responsibility, but was responsible for the overall direction of the enterprise and reporting to the SEC.

 William Alstrin, chief operating officer of Shanley Corp., was formerly president and chief operating officer of a Dallas bank.

 Dan Denton, the chief financial officer of Shanley Corp., is and was a CPA with experience at Peat, Marwick & Mitchell and within the oil and gas industry. He was the main accounting official at Shanley, with a staff as numerous, at its peak, as 25. When Denton left Shanley in late 1986, he was replaced by Tom Cook, formerly the comptroller at Shanley Corp. Cook had experience in both finance and oil and gas.

 Frank Lokash, the "land man" at Shanley Corp., was president of the Dallas Land Man's Association.

 Partnership Accounting

 All proceeds from the Norstate properties were remitted to Norstate's general partner, Shanley Production, which deposited the funds in a Fidelity National Bank account that was one of Shanley Corp.'s general bank accounts. From such accounts, Shanley Corp. paid its business expenses, including rent, payroll, geological costs, and well expenses. Neal McCabe was a signatory on this account and on all Shanley accounts.

 A bank account in the name of Norstate Limited Partnership was also maintained by the Shanley group. It was from this account that Shanley Production distributed Norstate proceeds to the limited partners, suggesting that Shanley Corp. periodically transferred Norstate well proceeds from the Fidelity account to this Norstate account.

 Every few months, money from the Norstate account was paid to the limited partners for distribution of profits earned by partnership wells. The distribution checks were signed by McCabe and other Shanley Corp. executives. Although rubber signature stamps and electronic signatures were sometimes used by Shanley employees, a comparison of McCabe's signatures on copies of several different checks demonstrates that McCabe signed the distribution checks personally on at least some occasions. See Ex. Z.

 These procedures were followed without incident through 1985, at which point Shanley Production ceased making distribution payments to the limited partners. ...


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