National account which held Norstate Limited Partnership funds. At the time, Denton believed that after the money was transferred to DeSoto, it could be wired back to the various original accounts 24 hours later. However, Denton had proceeded on a false assumption and, after the money was transferred to DeSoto, the bank refused Denton's request to withdraw it the next day.
McCabe testified that although he is unable to recall DeSoto's deposit request or Denton's discussion with him about it, he may have authorized the wire transfer. He admits that he was notified, within a week of the transfer, of the bank's refusal to return the funds.
In January, 1987, after making unsuccessful written demands for distribution payments owed the limited partners,
and having recently learned of the March, 1986 sale of the Lincoln 50, Spitzer and Ronald Offenkrantz, a member of his firm, flew to Shanley Corp.'s headquarters in Dallas to meet with Shanley representatives concerning the undistributed proceeds.
At a meeting attended by Shanley, Alstrin, and McCabe, the representatives of the limited partners were told that the partnership funds had been "glommed down on" by a bank, whose name was not disclosed. McCabe left the meeting five minutes after it began, and testified that he did not hear this portion of the conversation.
The 1986 Norstate Tax Return
Garrett Vogel, a Dallas accountant engaged to prepare the 1986 Norstate Limited Partnership tax return, calculated that as of December 31, 1986, the limited partners were owed approximately $ 897,000 (the sum for which they are presently suing) by Shanley Production. A letter from Vogel dated June 19, 1987, accompanied by a copy of the prepared return, was sent to Neal McCabe's office. Ex. 30.
On July 27, 1987, John Shanley signed the tax return on behalf of Shanley Production, Ex. 19.
On July 31, 1987, Tom Cook, who replaced Denton as Shanley Corp.'s chief financial officer in early 1987, sent a memo to McCabe and Shanley, stating that, in his opinion, Vogel's calculations were accurate, and Shanley Production owed the limited partners $ 897,862.57. Ex 8.
That month, McCabe and Shanley were visited in Dallas by Offenkrantz, who threatened legal action. McCabe, upset by the encounter, spoke to Shanley about it later in the day. Apparently referring to the status of the limited partners with respect to the Payne 20 cash call, Shanley said that there was a disagreement about the amount owed to the limited partners. He assured McCabe that he was "handling it." McCabe thereafter made no inquiries about money owed the limited partners.
The December 1987 Agreement
In December, 1987, John Shanley, acting on behalf of the general partner, entered into an agreement to transfer specific oil and gas properties to the limited partners in satisfaction of the debt owed them by Shanley Production.
The limited partners never discussed the December agreement with McCabe before it was executed by Shanley. After the agreement had been signed, McCabe was informed by three Shanley executives; Neil Toler, Tom Cook, and John Shanley, that the transferred properties more than adequately compensated the limited partners, but McCabe did not investigate the adequacy of the settlement himself.
Subsequently, the limited partners discovered that a significant number of the properties named in the December agreement had been previously pledged as security for loans made to Shanley Corp. and its subsidiaries.
CONCLUSIONS OF LAW
The limited partners seek damages resulting from, among other things, a breach of the fiduciary duty owed them and conversion of partnership assets by Shanley Production.
They maintain that as chairman of the board of Shanley Production, Norstate's general partner, and as an officer and director of Shanley Production's parent company, McCabe had a duty to become and remain informed about Shanley Production's obligations with respect to the Norstate partnership and to assure that those obligations were carried out. McCabe argues that as a director whose day-to-day responsibilities did not include oversight of the Norstate operations, he was entitled to rely upon the information and assurances given him by other Shanley officers and directors.
Before the legal propriety of McCabe's behavior can be measured, however, it is necessary to determine which state's law controls. The Norstate Limited Partnership was created under the laws of Oklahoma. Shanley Production, its general partner, is a Texas corporation whose parent, Shanley Corp., is a Delaware corporation. In light of the fact that the fiduciary duty at issue was created by a partnership formed in Oklahoma, it is appropriate to apply Oklahoma law to determine McCabe's personal responsibility as a director of Shanley Production for any breach by the corporate general partner. The law of the state in which an entity is formed or incorporated governs the nature and extent of that entity's fiduciary obligations and liability for violations of the law. See, e.g., Maywalt v. Parker & Parsley Petroleum Co., 808 F.Supp 1037, 1059 (S.D.N.Y. 1992) (Fiduciary duties created by a limited partnership agreement are to be interpreted according to the law of the state in which the partnership was created). Furthermore, McCabe has invoked Oklahoma law by arguing that the Oklahoma limited partnership act "incorporates the general corporate statutes," to which he looks for support. Summation Tr. at 34.
Under Oklahoma law, a fiduciary duty plainly existed between Shanley Production, Norstate's sole general partner, and the Norstate limited partners. See Oklahoma Co. v. O'Neil, 440 P.2d 978 (Okla. Sup. Ct. 1968) (A partner occupies a fiduciary position and owes a higher and greater duty to members of the partnership than he owes to one with whom he deals at arms length).
The precise moment at which Shanley first breached its fiduciary duty to the limited partners is unclear. Certainly, Shanley's failure to notify the limited partners of the sale of the partnership's interest in the Lincoln 50 wells -- and to forward a share of the sale proceeds -- was a breach of the duty it owed them. Similarly, the transfer of partnership funds to the Bank of DeSoto to cover checks written by Shanley Corp. constituted conversion and breached Shanley Production's fiduciary duty to the limited partners. The question to be resolved, however, is not whether Shanley Production breached its fiduciary duty to the limited partners, but at what point, if any, Neal McCabe may be held liable for losses to the limited partners caused by any such breach.
To support the proposition that he properly relied upon other executives to handle Shanley Production's fiduciary responsibilities, McCabe cites 18 O.S. § 1027(e), which states,
"a member of the board of directors, or a member of any committee designated by the board of directors, in the performance of his duties, shall be fully protected in relying in good faith upon the record of the corporation and upon such information, opinions, reports or statements presented to the corporation by any of the corporation's officers or employees, or committees of the board of directors, or by any other person as to matters the member reasonably believes are within such officer's, employee's, committee's, or other person's competence, and who have been selected with reasonable care by or on behalf of the corporation."